Question

ABC Corporation reported gross accounts receivable of $1.2 billion in 2008 with an allowance for doubtful accounts of $300 million. In 2009 the company's gross accounts receivable declined slightly to $1.1 billion and its allowance for doubtful accounts likewise declines to $150 million. Calculate the ratio of allowance for doubtful accounts divided by gross accounts receivable for both years. Discuss how ABC might be managing its earnings.

Answer 1

For 2008;

Gross accounts receivable are given = $1200000000

Allowance for doubtful accounts are given = $300000000

Thus Ratio will be calculated with the help of following formula;

Allowance for doubtful accounts / Gross accounts receivable

$300000000 / $1200000000 = 25%

For 2009;

Gross accounts receivable are given = $1100000000

Allowance for doubtful accounts are given = $150000000

Thus Ratio will be calculated with the help of following formula;

Allowance for doubtful accounts / Gross accounts receivable

$150000000 / $1100000000 = 13.64%

On the basis of above ratios it is clear that Allowance for doubtful accounts ratio has been decreased in 2009 in compare to 2008. Thus ABC company is managing its’ earnings efficiently in 2009 in compare to 2008 because there are more chances of recovery from accounts receivables in 2009.