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Interpreting Accounts Receivable

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Interpreting Accounts Receivable and Its Footnote Disclosure
Following is the current asset section from the W.W. Grainger, Inc., balance sheet.

As of December 31 ($ 000s) 2007 2006 2005
Cash and cash equivalents $ 113,437 $ 348,471 $ 544,894
Marketable securities at cost, which approximate market value 20,074 12,827 --
Accounts receivable (less allowances for
doubtful accounts of $25,830, $18,801
and $18,401, respectively) 602,650 566,607 518,625
Inventories, net 946,327 827,254 791,212
Prepaid expenses and other assets 61,666 58,804 54,334
Deferred income taxes 56,663 48,123 76,474
Prepaid income taxes --

Total current assets $ 1,800,817 $ 1,862,086 $ 1,985,539

Grainger reports the following footnote relating to its receivables.
Allowance for Doubtful Accounts: The following table shows the activity in the allowance for doubtful accounts.
For Years ended December 31 ($ 000s) 2007 2006 2005
Allowance for doubtful accounts- accounts receivable
Balance at beginning of period $ 18,801 $ 18,401 $ 23,375
Provision for uncollectable accounts 15,436 6,057 1,326
Write-off of uncollectible accounts, less recoveries (8,755) (5,660) (6,380)
Foreign currency exchange impact 348 3 80
________________________________________
Balance at end of period $ 25,830 $ 18,801 $ 18,401

(a) What amount do customers owe Grainger at each of the year-ends 2005 through 2007?
($ 000s) 2007 2006 2005

Gross accounts receivable $ $ $

(b) What percentage of its total accounts receivable does Grainger feel are uncollectible? Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts/Gross accounts receivable. Round your answers to two decimal places.
($ 000s) 2007 2006 2005
Percentage of uncollectible accounts to gross accounts receivable % % %

(c) What amount of bad debts expense did Grainger report in its income statement for each of the years 2005 through 2007?
($ 000s) 2007 2006 2005
Bad debts expense (titled Provision for Uncollectible Accounts) $ $ $

Land, Building and Equipment, Net
(in millions) 2007 2006
Land $ 146 $ 142
Buildings and improvements 2,000 1,900
Machinery and equipment 6,250 5,850
Capitalized interest 352 340
Construction in progress 271 218
________________________________________
Land, Building and Equipment, Gross 9,019 8,450
Less: Accumulated depreciation 5,908 5,481
________________________________________
Total $ 3,111 $ 2,969

(b) Evett and Sternard reported depreciation expense of $412 million in 2007. Estimate the useful life, on average, for its depreciable PPE assets. (Round your answer to two decimal places.)

(c) By what percentage are Evett and Sternard's assets "used up" at year-end 2007? (Round your answer to two decimal places.)

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Solution Preview

W.W. GRAINGER, Inc.

(a) The company records net accounts receivable. This means that for you to ascertain the actual that customers owe, you need to add the provision for bad debts to the amount of accounts receivable at the end of the year. In Grainger's case, the amounts customers owe are as follows:

2007
$25,830 + 602,650 = $628,480

2006
$18,801 + 566,607 = $585,408

2005
$18,401 + 518,625 = $537,026

(b) To calculate the percentage of accounts receivable that a company feels are uncollectible, you first need to compute the gross accounts receivable. In Grainger's case, the ...

Solution Summary

This solutions gives a step-by-step approach of computing the amount that customer's owe at the end of a financial year. The solution also shows how to calculate the percentage of debts that a company feels are uncollectible. Additionally, the solution shows how to identify the amount of bad debt expense from a balance sheet. Lastly, the solution shows how to compute the estimated useful value of depreciable assets, and how to compute the percentage by which assets are "used up".

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Interpreting Accounts Receivable and Its Footnote Disclosure

Following is the current asset section from the ABC, Inc. balance sheet

As of December 31 ($000s) 2010 2009 2008

Cash and cash equivalents 313454 459871 396290
Accounts receivable (less allowances
for doubt accounts of $24,552, $25,850
and $26,481 respectively) 762895 624910 589416
Inventories---net 991577 889679 1009932
Prepaid expenses and other assets 87125 88364 73359
Deferred income statement 44627 42023 52556
Prepaid income taxes 38393 26668 22556
Total Current Assets 2238071 2131515 2144109

ABC, Inc. reports the following footnote relating to its receivables
As of December 31 ($000s) 2010 2009 2008

Balance at beginning of period 25850 26481 25830
Provision for uncollectable accounts 6718 10748 12924
Write--off of uncollectable accounts, less recoveries -8302 -12254 -11501
Foreign currency translation impact 286 875 -772
Balance at end of period 24552 25850 26481

a. What amount do customers owe ABC at each of the year-ends 2008 through 2010?
b. What percentage of those accounts receivable on a does ABC feel are uncollectable? (Hint: prepare of accounts = Allowance for uncollectable accounts / Gross accounts receivable).
c. What amount of bad debts expense did ABC report in its income statement for each of the years 2008 through 2010?
d. Explain the changes in the balance of the allowance for uncollectable accounts since 2008. Specifically, did the allowance increase or decrease as a percentage of gross accounts receivable, and why?
e. If ABC had kept its 2010 allowance for uncollectable accounts at the same percentage of gross accounts receivable as it was in 2008, by what amount would its profit have changed (ignore taxes)? Explain
f. Overall, what is your assessment of ABC's allowance for uncollectable accounts and the related 2010, 2009, 2008, respectively, and the net earnings attributable to the company were $510,865, $430,466 and $475,355 ($ 000s).

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