Question

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)	2010	2009	2008
Cash and cash equivalents	$ 313,454	$ 459,871	$ 396,290
Accounts receivable (less allowances for doubtful accounts of $24,552, $25,850 and $26,481, respectively	762,895	624,910	589,416
Inventories, net	991,577	889,679	1,009,932
Prepaid expenses and other assets	87,125	88,364	73,359
Deferred income taxes	44,627	42,023	52,556
Prepaid income taxes	38,393	26,668	22,556
Total current assets	$ 2,238,071	$ 2,131,515	$ 2,144,109

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)	2010	2009	2008
Allowance for doubtful accounts- accounts receivable
Balance at beginning of period	$ 25,850	$ 26,481	$ 25,830
Provision for uncollectable accounts	6,718	10,748	12,924
Write-off of uncollectible accounts, less recoveries	(8,302)	(12,254)	(11,501)
Foreign currency exchange impact	286	875	(772)
Balance at end of period	$ 24,552	$ 25,850	$ 26,481

(a) What amount do customers owe Grainger at each of the year-ends 2008 through 2010?

($ 000s)	2010	2009	2008
Gross accounts receivable	$Answer	$Answer	$Answer

(c) 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)	2010	2009	2008
Percentage of uncollectible accounts to gross accounts receivable	Answer %	Answer %	Answer %

(d) What amount of bad debts expense did Grainger report in its income statement for each of the years 2008 through 2010?

($ 000s)	2010	2009	2008
Bad debts expense (titled Provision for Uncollectible Accounts)	$Answer	$Answer	$ Answer

The allowance for uncollectible accounts remained relatively the same as a percentage of gross accounts receivable.

The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable.

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable.

(d) If Grainger had kept its 2010 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2008, by what amount would its profit have changed (ignore taxes)? HINT: Use rounded answer from part b. to calculate. Round answer to the nearest thousands.
Profit would Answerincreasedecrease

by $Answer

($ 000s)

Answer 1

a) Calculation of Gross Accounts Receivable (Amount in '000 $)

Particulars	2010	2009	2008
Accounts receivable, Net	762,895	624,910	589,416
Add: Allowance for doubtful accounts closing balance	24,552	25,850	26,481
Gross Accounts Receivable	787,447	650,760	615,897

c) Calculation of percentage of uncollectible to its total accounts receivable

('000 $)	2010	2009	2008
1) Gross Accounts Receivable	787,447	650,760	615,897
2) Allowance for doubtful accounts closing balance	24,552	25,850	26,481
3) Percentage of uncollectible accounts to gross accounts receivable [(2/1)*100]	3.12%	3.97%	4.30%

d) Bad debt expense reported in its income statement

('000 $)	2010	2009	2008
Bad debts expense	$6,718	$10,748	$12,924

d) Allowance percentage in 2010 = 3.12%

Allowance percentage in 2008 = 4.30%

Increase in allowance % = 4.30% - 3.12% = 1.18%

Therefore the profit will decrease because the allowance amount is increased.

The decrease in profit = Gross Accounts receivable for 2010*Increase in allowance %

= $787,447*1.18% = $9,292 (All figures in '000 $)