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Exercise 1 As of the end of 2019, Stanley Black & Decker had outstanding accounts receivables in the amount of $1.57 billion but only reported
Exercise 1 As of the end of 2019, Stanley Black & Decker had outstanding accounts receivables in the amount of $1.57 billion but only reported $1.45 billion on its balance sheet. (Pratt p 243) Why would this be the case? Exercise 2 For many years Sears offered financing to its customers through a separate credit card business. The company suffered from management problems in that business, recording increasingly large reserves (allowances) to cover growing bad debts. Several years ago Sears sold its credit card business to Citigroup, a large financial institution. (Pratt p 246) What does it mean that Sears recorded 'increasingly large reserves (allowances) to cover growing bad debts'? Why might Citigroup be better suited to manage receivables? Exercise 3 The accounts receivable footnote in Delphi Technologies' 2019 annual report provided the following information (dollars in millions). The change in the allowance for bad debts is as follows (Pratt p 247): $ Millions Balance at the beginning of the year Provision for bad debts Uncollected receivables written off Balance at the end of the year Explain the meaning of this information in terms of the three steps described above. 18 11 -5 24 Exercise 4 Several years ago, Quovadx Inc., a business software company, was being investigated by the SEC. Apparently, the company booked millions of dollars in revenue on sales made to a group of non-U.S. information-technology companies, and over the next two years had not received any payments from them. (Pratt p 248) How do you think Quovadx should account for these facts? Explain how a reader of the financial statements might have been able to detect such a problem. Exercise 5 Assume that you were hired by ABC Department Stores in 2018 to develop and implement a new credit policy. At the time of your hire, the average collection period for an outstanding receivable was in excess of 90 days (far greater than the industry average). Thus, the primary purpose of the new policy was to better screen credit applicants in an attempt to improve the quality of the company's accounts receivable. Shown as follows are sales and accounts receivable data for the past four years (in thousands). Sales S Average accounts receivable $ 2019 19,200 3,400 3,208 3,264 2021 2020 34,000 29,160 2018 18,000 3,600 Based on the given data, was the credit policy you developed successful? Explain
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