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Analysis of Bad Debts

Difficulty: Advanced

Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company's gross accounts receivable.The relationship between the allowance and the balance in receivables should be relatively constant unless there is a change in the economy overall or a change in customer base.

Receivables Accounting Policy

Allowance for Doubtful Accounts

AT&T records expense to maintain an allowance for doubtful accounts for estimated losses that result from the failure or inability of the customers to make required payments deemed collectible from the customer when the service was provided or product was delivered. When determining the allowance, AT&T considers the probability of recoverability of accounts receivable based on past experience, taking into account current collection trends as well as general economic factors, including bankruptcy rates. Credit risks are assessed based on historical write-offs, net of recoveries, as well as an analysis of the aged accounts receivable balances with allowances generally increasing as the receivable ages. Accounts receivable may be fully reserved for when specific collection issues are known to exist, such as catastrophes or pending bankruptcies.

Source: AT&T Inc., Annual Report

Allowance for Doubtful Accounts Receivable

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Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Allowances for doubtful accounts 663  661  704  454  483 
Accounts receivable, gross 17,185  17,455  17,236  14,981  13,401 
Allowance as a percentage of accounts receivable, gross1 3.86% 3.79% 4.08% 3.03% 3.60%

Source: Based on data from AT&T Inc. Annual Reports

2017 Calculations

1 Allowance as a percentage of accounts receivable, gross = 100 × Allowances for doubtful accounts ÷ Accounts receivable, gross
= 100 × 663 ÷ 17,185 = 3.86%

Ratio Description The company
Allowance as a percentage of accounts receivable, gross Allowance for doubtful accounts divided by the gross accounts receivable. AT&T Inc.'s allowance as a percentage of accounts receivable, gross declined from 2015 to 2016 but then slightly increased from 2016 to 2017.