Question

Question text

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?

Generally, HP has overestimated its accruals, which has deflated profit by the over-accrual of bad debts.

Generally, HP has underestimated its accruals, which has inflated profit by the under-accrual of bad debts.

The difference between bad debt expense and write-off during the three years is insignificant so it appears that profit has been fairly stated.

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?

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2015. We can , therefore, expect write-offs to increase.

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.

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.

HPQ's write-offs as a percentage of the allowance increase from 2014 to 2015. This may imply that the allowance is too small.

Answer 1

(a) What is the gross amount of accounts receivables for Hewlett-Packard in fiscal 2015 and 2014?
($ millions)	2015	2014
Gross accounts receivable	$13,498	$13,982
Working	$	$
Net AR (Accounts Receivable)	13,363	13,832
Add back: Provision	46	25
Add: Deductions net of Recoveries	89	125
Gross AR	13,498	13,982
(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	1.40%	1.66%
Working
Allowance for doubtful accounts	189	232
Gross AR	13,498	13,982
% of allowance to gross AR	1.40%	1.66%
(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	46	25	23
Accounts receivable actually written off	89	125	155
Working
Closing provision	189	232	332
Less:Opening provision	232	332	464
Add back: actual bad debt written off	89	125	155
Bad Debt expense= Closing provision - opening provision+bad debt written off	46	25	23
Which of the following statements describes how bad debts expense compares with the amounts of its accounts receivable actually written off?
Generally, HP has overestimated its accruals, which has deflated profit by the over-accrual of bad debts.	False
Generally, HP has underestimated its accruals, which has inflated profit by the under-accrual of bad debts.	Validation: For all years the actual bad debt written off is more compared to the bad debt expense provision created during the year. Therefore HP is doing under accrual and as such profits are inflated.
The difference between bad debt expense and write-off during the three years is insignificant so it appears that profit has been fairly stated.	False
The difference between bad debt expense and write-off during the three years has inflated HPQ's cash flows reported.	False
(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%		38.36%
2014 write-offs as a percentage of beginning of year allowance: Answer%		37.65%
Working	2015	2014
write off amount	89	125
Allowance at the beginning of the year	232	332
%	38.36%	37.65%
What inferences can we draw as a result of changes in the allowance for doubtful accounts from 2014 to 2015?
The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2015. We can , therefore, expect write-offs to increase.	False
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.	False
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.	Validation: As allowance for uncollectible account as a % of AR in 2015 has decreased from 1.66% in 2014 to 1.40%, therefore this statement is true. Refer to working in sub-part 'b'.
HPQ's write-offs as a percentage of the allowance increase from 2014 to 2015. This may imply that the allowance is too small.	Validation: As bad debt write off as % of allowance has increased from 37.65% in 2014 to 38.36% in 2015, therefore this statement is true.