QUESTION 3

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Interpreting the Accounts receivable Footnote Hewlett-Packard Company (HPQ) reports the following in its 2012 10-K report.

October 31 (in millions)	2012	2011
Accounts receivable, net	$16,407	$18,224

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)	2012	2011	2010
Allowance for doubtful accounts-accounts receivable
Balance, beginning of period	$ 470	$ 525	$ 629
Increase in allowance from acquisition	--	27	7
Addition of bad debts provision	100	23	80
Deductions, net of recoveries	(106)	(105)	(191)
Balance, end of period	$ 464	$ 470	$ 525

(a) What is the gross amount of accounts receivables for HPQ in fiscal 2012 and 2011?

($ millions)	2012	2011
Gross accounts receivable	Answer	Answer

(b)What is the percentage of the allowance for doubtful accounts to gross accounts receivable for 2012 and 2011? (Round your answers to two decimal places.)

($ millions)	2012	2011
Percentage of uncollectible accounts to gross accounts receivable	Answer %	Answer %

(c)What amount of bad debts expense did HPQ report each year 2010 through 2012 (ignore increase in allowance from acquisitions)? What amount was actually written off?

($ millions)	2012	2011	2010
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.

1.00 points out of 1.00

(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) 2012 write-offs as a percentage of beginning of year allowance: Answer

% 2011 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 2011 to 2012?

The allowance for uncollectible accounts has increased as a percentage of gross accounts receivable in 2012. We can , therefore, expect write-offs to increase.

HPQ's write-offs as a percentage of the allowance decreased from 2011-2012. 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 2012. 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 2011 to 2012. This may imply that the allowance is too large.