Using the 3 documents attached, can you complete this assignment?

Professional judgment framework - application scenarios - allowance for doubtful accounts 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121P1 Accounts receivable allowance analysis 0 to 30 days $30,000,000 71.43% $1,200,000 4.00% 31 to 60 days $4,000,000 9.52% $400,000 10.00% 61 to 90 days $2,500,000 5.95% $550,000 22.00% 91 to 120 days $4,000,000 9.52% $800,000 20.00% Over 120 days $1,500,000 3.57% $1,200,000 80.00% Total $42,000,000 2010 accounts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentage Actual uncollectible write-off Actual write-off percentage $35,000,000 66.04% $700,000 2.00% $10,000,000 18.87% $800,000 8.00% $3,000,000 5.66% $900,000 30.00% $1,000,000 1.89% $400,000 40.00% $4,000,000 7.55% $2,200,000 55.00% $53,000,000 2011 accounts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentage Actual uncollectible write-off Actual write-off percentage $30,000,000 62.50% $300,000 1.00% $8,000,000 16.67% $600,000 7.50% $4,000,000 8.33% $800,000 20.00% $2,000,000 4.17% $800,000 40.00% $4,000,000 8.33% $1,800,000 45.00% $48,000,000 2012 accounts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentage $15,000,000 22.39% $600,000 4.00% $27,000,000 40.30% $2,700,000 10.00% $10,000,000 14.93% $3,000,000 30.00% $5,000,000 7.46% $2,000,000 40.00% $10,000,000 14.93% $8,000,000 80.00% $67,000,000 2009 accounts receivable aging balance Aging percentage Estimated uncollectible Estimated uncollectible percentage Actual uncollectible write-off Actual write-off percentage $4,150,000 9.88% $4,200,000 10.00% $5,000,000 9.43% $5,100,000 9.62% $4,300,000 8.96% $4,200,000 8.75% $16,300,000 24.33% Professional judgment framework Tool to track, organize and evaluate considerations Overarching considerations Manage any personal bias and consider the bias of others: Avoid making preliminary judgments. Consider all points of view and alternatives. Understand motivations or incentives for particular outcomes. Consider the risk of material misstatement: Evaluate quantitative and qualitative significance relative to the issue and relative to the interests of stakeholders Consider the involvement of others: Consider subject-matter specialists, consultation and necessary reviews and approvals. Maintain professional skepticism, including fraud awareness: Maintain a questioning mindset and ask probing questions. Objectively evaluate the facts, address inconsistencies and corroborate evidence. Assume others are neither honest nor dishonest. Be alert for indicators of possible misstatement due to error or fraud. Professional judgment framework - application template 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121R 1 Considerations to define the issue What is the primary issue? Considerations to gather the facts What is the application guidance? What information do you need to address the issue? Is the information you have obtained relevant and reliable? Considerations to perform the analysis How does the applicable guidance apply to the issue? Have you identified and evaluated the key assumptions? What are the reasonable outcomes and possible alternatives? Considerations to make the judgment What is your conclusion based on the analysis performed? Does your conclusion make sense in light of the business purpose and underlying economics of the issue? Professional judgment framework - application template 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121R 2 Tool to document the judgment Document your judgment. A memorandum format to do so is suggested below. Upon completing your documentation, ensure that you are able to appropriately answer the following considerations: Is the documentation sufficient to support your judgment? Can another professional understand how you reached your conclusion (including why reasonable outcomes and possible alternatives identified were not selected)? Overall memorandum Issue: Facts: Analysis: Judgment: Professional judgment framework - application template 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121R 3 Professional judgment framework Allowance for doubtful accounts Background Wildcat Sporting Goods (WSG) sells athletic shoes and trendy sports apparel to a variety of sporting goods stores in the Northeast and, in 2011, WSG also began direct internet sales to consumers. WSG's common shares are publicly traded and WSG has a December 31 year-end. WSG has historically received an unqualified opinion from its audit firm. Selected financial data is provided below: 2009 Sales $300,000,000 Credit sales Allowance for doubtful accounts Pretax income $360,000,000 2012 $420,000,000 $370,000,000 100% 90% 80% 0% 0% 10% 20% $42,000,000 $53,000,000 $48,000,000 $67,000,000 $4,150,000 $5,000,000 $4,300,000 $16,300,000 Allowance/accounts receivable Total assets 2011 100% Internet sales Accounts receivable 2010 9.88% 9.43% 8.96% 24.33% $200,000,000 $250,000,000 $300,000,000 $320,000,000 $10,000,000 $12,000,000 $15,000,000 *$4,000,000 * 2012 pretax income is an estimate Assume that you are the controller. At year-end, the CFO has asked you to determine the amount of the allowance for doubtful accounts for accounts receivable. The CFO received an accounts receivable allowance analysis (see attached Excel spreadsheet) from the new credit manager that estimated an allowance of $16.3 million, which is up significantly from the prior year. The CFO is expecting you to scrutinize the attached analysis as she expects that the allowance balance should not exceed last year's allowance, given that sales are down approximately 12% from the prior year. The aging in the attached analysis indicates the days outstanding since the original sale (e.g., a 30-day-old receivable would indicate the sale occurred 30 days ago and not that the receivable is 30 days past due). The CFO also mentioned the company's debt covenants require, among other things, pretax earnings of at least $10.0 million. You had discussions with various personnel this month and have gained the following additional insights. Professional judgement framework - application scenarios - allowance for doubtful accounts 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121P1 1 An economic recession has resulted in WSG's sales declining in 2012. In an effort to improve its sales, WSG extended more generous credit terms to its customers. Beginning in the fourth quarter of 2012, customers were granted an additional 30 days to pay off their debts, so the credit window has been extended from 30 days to 60 days. Days sales outstanding have increased slightly from approximately 44 days in 2011 to 57 days in 2012. The internet sales have little credit risk as the credit card company must approve the charge before any shipments are made. These sales are settled in less than 30 days. The December 31 receivable balances on internet sales in the 0-30 aging were $3.0 million and $6.0 million in 2011 and 2012, respectively. With the exception of a few large customers, the receivables are due from a large group of small, homogenous customers. The estimated allowance for doubtful accounts has been based on general expectations and historical losses for most accounts receivable. The average credit score of customers in 2012 is essentially unchanged from prior years. For those customers with more than a $500,000 balance, a specific analysis of accounts receivable is performed. Estimates of the allowance for doubtful accounts were a bit less than actual losses in 2009 and 2010, and a bit higher than actual losses in 2011. See the attached allowance analysis. Approximately 22.4% of the accounts receivable balance at December 31, 2012, is over 91 days old. Based on a discussion with the Senior VP of Sales, the following is a summary of the major customers with balances over $500,000. Sports World's accounts receivable from 2011 remains outstanding at December 31, 2012. This customer agreed to pay off this balance by paying $200,000 per month starting in August 2012. The first three monthly payments were made and the balance at December 31, 2012, is $3.0 million. The payments due in November 2012, December 2012 and January 2013 have not been received. The phone calls of the credit manager have not been returned. At December 31, 2011, the receivable was 31 to 60 days old and this receivable was reserved at the same level as other receivables in this aging category. A new customer in 2011, Slow Pay, has always paid their bills after they sell the product. At December 31, 2012, Slow Pay has an outstanding balance of $10.0 million; $3.0 million is over 120 days old, $2.0 million is 91 to 120 days old and $5.0 million is 31 to 60 days old. Payments continue to be received and all amounts over 120 days old at December 31, 2012 were collected in January 2013. At December 31, 2011, Slow Pay had an outstanding balance of $4.0 million; $500,000 was over 120 days old, $500,000 was 91 to 120 days old, $2.0 million was 31 to 60 days old and $1.0 million was 0 to 30 days old. No reserve was provided for this customer's receivables in 2011 and all amounts were collected in 2012. New Wave, has an outstanding balance of $5.0 million at December 31, 2012; $1.0 million is over 120 days old, $1.5 million is 91 to120 days old and the $2.5 million balance is 61 to 90 days old. This company was a new start-up in 2012 and, therefore, WSG does not have any credit history for New Wave. WSG has put a hold on additional shipments to New Wave until payments are received. The credit manager said there are rumors that the company might go into bankruptcy. Separately, in December 2012, the Senior VP of Sales spoke to the wealthy owner of New Wave, who personally assured him that New Wave intended to pay their outstanding balance in the coming weeks. In January 2013, the Senior VP of Sales obtained a written personal guarantee of the amounts owed from the Professional judgement framework - application scenarios - allowance for doubtful accounts 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121P1 2 owner of New Wave. The personal financial statements of the owner confirmed he has a net worth in excess of $20.0 million. High Flyer has an outstanding of $1.0 million at December 31, 2012: $500,000 is 61 to 90 days old and the balance is 31 to 60 days old. The owners of High Flyer have just put another company they own in a troubled industry into bankruptcy. None of the remaining customer balances are greater than $500,000 at December 31, 2012. At December 31, 2011, the only two customers with balances over $500,000 were Sports World and Slow Pay. Prior to 2011, the company did not have any customers whose balance exceeded $500,000 at year-end. The new credit manager's compensation is, in part, tied to his ability to reduce the write-off rate for sales starting in 2013. Thus, the credit manager has an incentive to justify more significant write-offs in the current year than may be warranted. Required Reference the professional judgment framework handout and application template separately provided. For December 31, 2012, perform an assessment of the allowance for doubtful accounts receivable. Using the professional judgment framework, complete the application template for all process steps and provide the appropriate information in the documentation column. - In performing your analysis, you should use an Excel spreadsheet to support any calculations. (Note: It may be best to use the allowance analysis provided by the credit manager as a starting point for your analysis.) Using the information you documented regarding the specific and overarching considerations for each process step in the framework, document your judgment in a draft memorandum format that you will provide to the CFO (not to exceed three pages). Upon completing your documentation, make certain that you are able to answer the following questions: - Is the documentation sufficient to support your judgment? - Can another professional understand how you reached your conclusion (including why reasonable outcomes and possible alternatives identified were not selected)? Professional judgement framework - application scenarios - allowance for doubtful accounts 2012 Ernst & Young Foundation (US). All Rights Reserved. SCORE No. MM4121P1 3