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 ($
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) | 2005 | 2004 | 2003 |
---|---|---|---|
Cash and cash equivalents | $ 544,894 | $ 429,246 | $ 402,824 |
Accounts receivable (less allowances for doubtful accounts of $18,401, $23,375 and $24,736, respectively | 518,625 | 480,893 | 431,896 |
Inventories, net | 791,212 | 700,559 | 661,247 |
Prepaid expenses and other assets | 54,334 | 47,086 | 37,947 |
Deferred income taxes | 88,803 | 96,929 | 99,499 |
Prepaid income taxes | -- | -- | -- |
Total current assets | $ 1,997,868 | $ 1,754,713 | $ 1,633,413 |
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) | 2005 | 2004 | 2003 |
---|---|---|---|
Allowance for doubtful accounts- accounts receivable | |||
Balance at beginning of period | $ 23,375 | $ 24,736 | $ 26,868 |
Provision for uncollectable accounts | 1,326 | 5,159 | 9,263 |
Write-off of uncollectible accounts, less recoveries | (6,380) | (6,662) | (11,713) |
Foreign currency exchange impact | 80 | 142 | 318 |
Balance at end of period | $ 18,401 | $ 23,375 | $ 24,736 |
(a) What amount do customers owe Grainger at each of the year-ends 2003 through 2005?
($ 000s) | 2005 | 2004 | 2003 |
---|---|---|---|
Gross accounts receivable | $Answer | $Answer | $Answer |
(b) What percentage of its total accounts receivable does Grainger feel are uncollectible? Hint: Percentage of uncollectible accounts = Allowance for uncollectible accounts/Gross accounts receivable. Round your answers to two decimal places.
($ 000s) | 2005 | 2004 | 2003 |
---|---|---|---|
Percentage of uncollectible accounts to gross accounts receivable | Answer % | Answer % | Answer % |
(c) What amount of bad debts expense did Grainger report in its income statement for each of the years 2003 through 2005?
($ 000s) | 2005 | 2004 | 2003 |
---|---|---|---|
Bad debts expense (titled Provision for Uncollectible Accounts) | $Answer | $Answer | $Answer |
(d) Which of the following statements most closely describes what we observe in our answer to part (b)?
The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2005. The allowance is decreasing appropriately because write-offs of uncollectible accounts are also decreasing.
The allowance for uncollectible accounts has decreased as a percentage of gross accounts receivable in 2005. This means that Grainger is over-stating its bad debt expense in the current year.
The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2005. The allowance is increasing appropriately because write-offs of uncollectible accounts are also increasing.
The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2005. This means that the allowance was too low in prior years.
(e) If Grainger had kept its 2005 allowance for uncollectible accounts at the same percentage of gross accounts receivable as it was in 2003, 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. Please provide details on answering this section.
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