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

Accounts receivable

Accounts receivable are stated net of an allowance for doubtful accounts. The accounts receivable balance primarily includes amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies, governmental agencies and long-term care facilities), clients, members and private pay customers, as well as vendors and manufacturers. Charges to bad debt are based on both historical write-offs and specifically identified receivables.

Source: CVS Health Corp., Annual Report

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Allowance for Doubtful Accounts Receivable

 
Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014 Dec 31, 2013
Selected Financial Data (USD $ in millions)
Allowance for doubtful accounts receivable 307  286  161  256  256 
Accounts receivable, gross 13,488  12,450  12,049  9,943  8,985 
Ratio
Allowance as a percentage of Accounts receivable, gross1 2.28% 2.30% 1.34% 2.57% 2.85%

Source: Based on data from CVS Health Corp. Annual Reports

2017 Calculations

1 Allowance as a percentage of Accounts receivable, gross = 100 × Allowance for doubtful accounts receivable ÷ Accounts receivable, gross
= 100 × 307 ÷ 13,488 = 2.28%

Ratio Description The company
Allowance as a percentage of Accounts receivable, gross Allowance for doubtful accounts divided by the gross accounts receivable. CVS Health Corp.'s allowance as a percentage of Accounts receivable, gross increased from 2015 to 2016 but then slightly declined from 2016 to 2017.

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