Question & Answer: Annual Report Exercise -Amazon.Com: The following information relates to the 10K of Amazon.com Inc. for the year ended December 31,2015…..

4. Compute allowance for doubtful accounts as a percentage of gross AR for 2015 and 2014. Comment on the change in the ratio.

5. Assume that the amount of receivables written off in 2015 only relates to receivables of years prior to 2015. Calculate the ratio of 2015 write-off to AR (gross) at the end of 2014.

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6. Interpret the quality of Amazon’s AR and the adequacy of their 2015 allowance in light of your answers to (3), (4) and (5) above.

. Annual Report Exercise -Amazon.Com: The following information relates to the 10K of Amazon.com Inc. for the year ended December 31,2015. (in Millions) 2015 107,006 6,423 2014 88,988 5,612 2013 Sales revenue Accounts receivable (net) and other 4,767 Note 1 - DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES appears in Amazons Notes to Consolidated Financial Statements. The item Accounts Receivable below is part of their Note 1 Accounts Receivable, Net and Other Included in “Accounts receivable, net and other on our consolidated balance sheets are amounts primarily related to customer and seller receivables and vendor receivables. We estimate losses on receivables based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for doubtful accounts was $189 million, $190 million, and $153 million as of December 31, 2015,2014, and 2013. Additions to the allowance were $289 million, $225 million, and $172 million, and deductions to the allowance were $290 million, $188 million, and $135 million in 2015, 2014, and 2013. Required: 1. Complete the T-Account for Allowance for Doubtful accounts for 2015 and 2014. Label the additions and deductions appearing in the T-Account appropriately to show what the item represents 2. Compute the gross amount of accounts receivable (AR) for Amazon for the years 2015 and 2014 3. Calculate the average collection period (in days) for 2015 and 2014. Comment on the change from 2014 to 2015.

Annual Report Exercise -Amazon.Com: The following information relates to the 10K of Amazon.com Inc. for the year ended December 31,2015. (in Millions) 2015 107,006 6,423 2014 88,988 5,612 2013 Sales revenue Accounts receivable (net) and other 4,767 Note 1 – DESCRIPTION OF BUSINESS AND ACCOUNTING POLICIES appears in Amazon’s Notes to Consolidated Financial Statements. The item “Accounts Receivable” below is part of their Note 1 Accounts Receivable, Net and Other Included in “Accounts receivable, net and other” on our consolidated balance sheets are amounts primarily related to customer and seller receivables and vendor receivables. We estimate losses on receivables based on known troubled accounts and historical experience of losses incurred. Receivables are considered impaired and written-off when it is probable that all contractual payments due will not be collected in accordance with the terms of the agreement. The allowance for doubtful accounts was $189 million, $190 million, and $153 million as of December 31, 2015,2014, and 2013. Additions to the allowance were $289 million, $225 million, and $172 million, and deductions to the allowance were $290 million, $188 million, and $135 million in 2015, 2014, and 2013. Required: 1. Complete the T-Account for Allowance for Doubtful accounts for 2015 and 2014. Label the additions and deductions appearing in the T-Account appropriately to show what the item represents 2. Compute the gross amount of accounts receivable (AR) for Amazon for the years 2015 and 2014 3. Calculate the average collection period (in days) for 2015 and 2014. Comment on the change from 2014 to 2015.

Expert Answer

 

1 Allowance for doubtful accounts
Date Particulars Debit
($ in millions)
Credit
($ in millions)
2014
Opening balance 153
Baddebt expenses 225
Accounts receivable 188
Total 188 378
Closing balance 190
2015 Opening balance 190
Baddebt expenses 289
Accounts receivable 290
Total 290 479
Closing balance 189
2 Gross accounts receivable=Net accounts receivable+Deductions to allowance
Year 2014
Gross accounts receivable=5612+188=5800
Year 2015
Gross accounts receivable=6423+290=6713
3 Average collection period=(Average accounts receivable/Credit sales)*365
For 2014
Average accounts receivable=(Opening accounts receivable+Closing accounts receivable)/2
Average accounts receivable=(4767+5612)/2=5189.50
Average collection period=(5189.50/88988)*365=21.29 days
For 2015
Average accounts receivable=(Opening accounts receivable+Closing accounts receivable)/2
Average accounts receivable=(5612+6423)/2=6017.50
Average collection period=(6017.50/107006)*365=20.53 days
Average collection period is the average time taken for collecting accounts receivable
Average collection from 2014 to 2015 has decreased from 21.29 days to 20.53 days.

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