Question

Hewlett-Packard Company (HPQ) reports the following in its 2007 10-K report.

October 31 (in millions)	2007	2006
Accounts receivable, net	$13,420	$10,873

HPQ footnotes to its 10-K provide the following additional information relating to its allowance for doubtful accounts.

For the fiscal years ended October 31 (in millions)	2007	2006	2005
Allowance for doubtful accounts-accounts receivable
Balance, beginning of period	$ 220	$ 227	$ 286
Increase in allowance from acquisition	3	4	--
Addition of bad debts provision	32	37	17
Deductions, net of recoveries	(29)	(48)	(76)
Balance, end of period	$ 226	$ 220	$ 227

(a) What is the gross amount of accounts receivables for HPQ in fiscal 2007 and 2006?

($ millions)	2007	2006
Gross accounts receivable	Answer	Answer

(b)What is the percentage of the allowance for doubtful accounts to gross accounts receivable for 2007 and 2006? (Round your answers to two decimal places.)

($ millions)	2007	2006
Percentage of uncollectible accounts to gross accounts receivable	Answer	Answer

(c)What amount of bad debts expense did HPQ report each year 2005 through 2007? What amount was actually written off?

($ millions)	2007	2006	2005
Bad debt expense	Answer	Answer	Answer
Amount 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 HPQ's write-offs as a percentage of the allowance account at the beginning of the year (Round your answers to two decimal places).
2007 write-offs as a percentage of beginning of year allowance: Answer%
2006 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 2006 to 2007?

HPQ's write-offs as a percentage of the allowance decreased from 2006-2007. 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 2007. We can , therefore, expect write-offs to increase.

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2007. 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 decreased from 2006-2007. The reduction in write-off is reflected in their income statement as a corresponding reduction of bad debt expense and an increase in profit.

Answer 1