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Illinois Tool Works Inc. (ITW)
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
Trade receivables
Trade receivables are net of allowances for doubtful accounts. Prior to 2018, the allowance for doubtful accounts included reserves for uncollectible accounts and customer credits. Under the new revenue guidance adopted on January 1, 2018, the reserve for customer credits is reported as a liability and included in "Other accrued expenses." Accordingly, after January 1, 2018, the allowance for doubtful accounts comprises of reserves for uncollectible accounts.
Source: 10-K (filing date: 2019-02-15).
Allowance for Doubtful Accounts Receivable
Based on: 10-K (filing date: 2019-02-15), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-10), 10-K (filing date: 2016-02-12), 10-K (filing date: 2015-02-13).
2018 Calculations
1 Allowance as a percentage of trade receivables, gross = 100 × Allowance for doubtful accounts ÷ Trade receivables, gross
= 100 × ÷ =
| Ratio | Description | The company |
|---|---|---|
| Allowance as a percentage of trade receivables, gross | Allowance for doubtful accounts divided by the gross accounts receivable. | Illinois Tool Works Inc.’s allowance as a percentage of trade receivables, gross declined from 2016 to 2017 and from 2017 to 2018. |