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Interpreting the Accounts Receivable Footnote

Interpreting the Accounts Receivable Footnote
Hewlett-Packard Company reports the following in its 2015 10-K report.

October 31
(in millions)

2015

2014
Accounts receivable $13,363 $13,832


Footnotes to the company's 10-K provide the following additional information relating to its allowance for doubtful accounts.

For the fiscal years ended October 31
(in millions)

2015

2014

2013
Allowance for doubtful accounts-accounts receivable      
Balance, beginning of period $232 $332 $464
Provision for doubtful accounts 46 25 23
Deductions, net of recoveries (89) (125) (155)
Balance, end of period $189 $232 $332


(a) What is the gross amount of accounts receivables for Hewlett-Packard in fiscal 2015 and 2014?

($ millions) 2015 2014
Gross accounts receivable Answer? Answer?


(b)What is the percentage of the allowance for doubtful accounts to gross accounts receivable for 2015 and 2014? (Round your answers to two decimal places.)

($ millions) 2015 2014
Percentage of uncollectible accounts to gross accounts receivable %Answer? %Answer?


(c)What amount of bad debts expense did Hewlett-Packard report each year 2013 through 2015 (ignore increase in allowance from acquisitions)? What amount was actually written off?

($ millions) 2015 2014 2013
Bad debt expense Answer? Answer? Answer?
Amounts actually written off Answer? Answer? Answer?


Which of the following statements describes how bad debts expense compares with the amounts of its accounts receivable actually written off?

a.) Generally, HP has overestimated its accruals, which has deflated profit by the over-accrual of bad debts.
b.) Generally, HP has underestimated its accruals, which has inflated profit by the under-accrual of bad debts.
c.) The difference between bad debt expense and write-off during the three years is insignificant so it appears that profit has been fairly stated.
d.) The difference between bad debt expense and write-off during the three years has inflated HPQ's cash flows reported.



(d)Compute Hewlett-Packard's write-offs as a percentage of the allowance account at the beginning of the year.
(Round your answers to two decimal places)
2015 write-offs as a percentage of beginning of year allowance: Answer%?
2014 write-offs as a percentage of beginning of year allowance: Answer%?

 

What inferences can we draw as a result of changes in the allowance for doubtful accounts from 2014 to 2015?

a.) The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2015. We can , therefore, expect write-offs to increase.
b.) HPQ's write-offs as a percentage of the allowance decreased from 2014-2015. By this measure it appears that HPQ is accurately accruing for anticipated credit losses.
c.) The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2015. This means that HPQ is over-stating its bad debt expense in the current year.
d.) HPQ's write-offs as a percentage of the allowance increased from 2014 to 2015. This may imply that the allowance is too small.
 

Sep 22 2020 Read more Less More

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