Analysis of Bad Debts
Allowance for doubtful accounts receivable (bad debts) is a contra account which reduce the balance of the company 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.
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- Statement of Comprehensive Income
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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2021-09-30), 10-K (reporting date: 2020-09-30), 10-K (reporting date: 2019-09-30), 10-K (reporting date: 2018-09-30), 10-K (reporting date: 2017-09-30), 10-K (reporting date: 2016-09-30).
1 2021 Calculation
Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × ÷ =
The allowance for doubtful accounts reveals a moderate fluctuation over the examined periods. Starting at $61 million in 2016, it decreased to $54 million in 2017, then increased to $75 million for both 2018 and 2019, reaching a peak of $80 million in 2020, before slightly declining to $76 million in 2021. This suggests periodic adjustments in the estimation of uncollectible receivables, reflecting changes in credit risk or collection experience.
Trade receivables, gross, have demonstrated a consistent upward trend throughout the periods analyzed. Beginning at $1,679 million in 2016, this figure rose steadily year-over-year, reaching $2,573 million by 2021. This progression indicates increasing sales on credit or extended credit terms, contributing to a buildup of receivables on the balance sheet.
Examining the allowance for doubtful accounts as a percentage of gross trade receivables provides insight into the company's risk assessment relative to receivables size. The ratio decreased from 3.63% in 2016 to a low of 3.00% in 2017, then remained relatively stable, fluctuating slightly between 3.00% and 3.23% through 2020, before declining again to 2.95% in 2021. This slight downward trend implies an improvement in the quality of receivables or more effective credit risk management, as the proportion of expected uncollectible amounts relative to total receivables slightly diminished despite the growth in the gross receivables balance.
Overall, the data suggests that while the gross trade receivables have increased significantly, the allowance for doubtful accounts has not risen proportionally, and the relative allowance percentage has slightly declined. This pattern can be indicative of strengthened credit policies, improved collections, or a shift in customer base towards lower-risk clients during the reported periods.