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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Allowance for Doubtful Accounts Receivable
Based on: 10-K (reporting date: 2023-12-31), 10-K (reporting date: 2022-12-31), 10-K (reporting date: 2021-12-31), 10-K (reporting date: 2020-12-31), 10-K (reporting date: 2019-12-31).
1 2023 Calculation
Allowance as a percentage of receivables, gross = 100 × Allowance for doubtful accounts ÷ Receivables, gross
= 100 × ÷ =
The financial data reveals notable fluctuations in both the allowance for doubtful accounts and gross receivables over the analyzed period from the end of 2019 through 2023.
- Allowance for Doubtful Accounts
- The allowance exhibited an overall increasing trend, rising from $17 million in 2019 to $44 million in 2023. There was a slight increase to $18 million in 2020 followed by a sharp rise to $40 million in 2021. This was succeeded by a decrease to $29 million in 2022, before reaching the highest value of $44 million in 2023. This variability might indicate changing assessments of credit risk or adjustments in credit policies over the years.
- Gross Receivables
- Gross receivables showed significant volatility with a decline from $7,889 million in 2019 to $5,778 million in 2020. This was followed by a substantial increase to $11,074 million in 2021 and a further rise to $13,506 million in 2022. The amount then decreased to $11,663 million in 2023. Such changes suggest fluctuations in sales or credit terms impacting accounts receivable balance.
- Allowance as a Percentage of Gross Receivables
- This ratio varied over the period, beginning at 0.22% in 2019, increasing moderately to 0.31% in 2020 and peaking slightly higher at 0.36% in 2021. It then dropped significantly to 0.21% in 2022 before rising sharply to 0.38% in 2023. These shifts indicate changing proportional provisions against receivables, which may reflect adjustments in risk evaluation or collection experience relative to the receivable base.
Overall, the data illustrate a dynamic credit environment with allowances and receivables impacted by fluctuating business conditions or credit policies. The increase in the allowance for doubtful accounts in recent years, particularly in 2023, coupled with a higher allowance percentage, suggests a more cautious stance on collectibility of receivables despite the variations in gross receivables.