Question

If Harley Davidson’s managers determined that the balance in their allowance for bad debt at the...

If Harley Davidson’s managers determined that the balance in their allowance for bad debt at the end of fiscal 2017 was $100,000 too high, and they decided to reduce it, what effect would this have on the company’s ROA, gross profit margin ratio, and net profit margin ratio during 2017? Assume no tax effects.

  1. Effect on ROA:

  2. Effect on Gross Profit Margin Ratio:

  3. Effect on Net Profit Margin Ratio:

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Answer #1

Effect on ROA: ROA = Net income / Average asset . If allowance for bad debt reduces net income will increase and this will result in increase in ROA

Effect on Gross Profit Margin Ratio : Gross profit margin = Gross profit / Sales . With changes in allowance for bad debt policy there will not be any impact on gross profit margin.

Effect on Net Profit Margin Ratio: Net profit margin = Net income / Total sales. If allowance for bad debt reduces net income will increase and this will result in increase in net profit margin ratio.

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