Question

The company is loath to write off customer accounts receivable even though the financial vice president makes entirely adequate provision for uncollectible amounts in the allowance for bad debts. The gross receivables and the allowance both contain amounts that should have been written off long ago. How are these ratios affected compared to what they would have been if the old receivables had been properly written off: current ratio, days’ sales in receivables, doubtful account ratio, receivables turnover, return on beginning equity, and working capital/total assets?

Answer 1

Answer:

Ratio effects
1.   Current ratio = current assets/current liabilities
The ratio will decrease as the accounts receivable after writing of debtors and credit sales will be unaffected hence ratio will decrease.

2.   Day’s sales in receivables = accounts receivable/daily credit sales
The ratio will decrease as the accounts receivable after writing off debtors and credit sales will be unaffected.

3.   Doubtful account ratio increase,
Doubtful ratio will decrease as the writing off debtors will reduce the amount of provision from doubtful debts. And it will put adverse affect on ratio (decrease the ratio).

4.   Receivable turnover = annual credit sales/accounts receivable
The ratio will increase assuming that credit sales will be greater than account receivable as the amount of credit sales and receivable will decrease by the same amount.

5.   Return on beginning equity = net income /equity
the ratio will decrease as net income will decrease due to decrease in bad debts

6.   Working capital to total assets turnover ratio = working capital/total assets

The ratio will decrease as working capital and total assets will be reduced by the same amount as total assets are greater than working capital.