The following information is taken from the financial statements of Columbia Hea
ID: 2547717 • Letter: T
Question
The following information is taken from the financial statements of Columbia Health Care Inc.: Excerpts from Balance Sheets as of end of Gross accounts receivable Allowance for doubtful accounts Net accounts receivable 36,944,000 s3651,000 25.451000 Excerpts from Income Statements for the Years Ended Year 3 Year 1 Year 2 Sales Revenue (all credit) Bad Debt Expense Operating income before taxes $137,002,000 136,354,000 8,148,000 5,846,000 (3,900,000) $136,946,000 8,628,000 9,321,000 1,048,000 Required: (1) Compute the following ratios Accounts receivable turnover ratio for Years 2 and 3 a) b) Allowance for doubtful accounts divided by accounts receivable at the end of Years 2 and 3Explanation / Answer
2. The allowance for doubtful accounts/ending accounts receivable ratio is subject to management manipulation since there is estimation involved in determining the allowance for doubtful accounts. This estimation may be manipulated by the management.
3. Write-offs of Accounts receivables for Year 3: $6876000
4. The accounts receivables turnover ratio for Year 3 has deteriorated as compared to Year 2 from 5.23 times to 4.59 times which shows that Columbia is not managing its accounts receivables well. Also, its allowance ratio has decreased from 15.66% in Year 2 to 10.62% in Year 3. With a decreasing receivables turnover ratio, a higher allowance ratio may be required in Year 3. Thus, it seems the allowance for doubtful accounts may not be adequate.
Per Chegg guidelines, 4 sub-parts have been answered.
1 Year 2 Year 3 (a) Accounts receivable turnover ratio: Sales/Average accounts receivable Sales 136354000 137002000 Average accounts receivable: Beginning accounts receivable (net) 25451000 26696000 Ending accounts receivable (net) 26696000 33019000 Total accounts receivable 52147000 59715000 Average accounts receivable 26073500 29857500 Accounts receivable turnover ratio 5.23 4.59 (b) Allowance for doubtful accounts/Ending AR: Allowance for doubtful accounts 4955000 3925000 Ending AR (gross) 31651000 36944000 Allowance for doubtful accounts/Ending AR 15.66% 10.62%Related Questions
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