Analysis of Bad Debts
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.
Allowance for Credit Losses
1 2020 Calculation
Allowance as a percentage of finance receivables, gross = 100 × Allowance for credit losses ÷ Finance receivables, gross
= 100 × 475 ÷ 22,160 = 2.14%
|Financial ratio||Description||The company|
|Allowance as a percentage of finance receivables, gross||Allowance for credit losses divided by the gross financing receivable.||Caterpillar Inc.’s allowance as a percentage of finance receivables, gross decreased from 2018 to 2019 but then increased from 2019 to 2020 not reaching 2018 level.|