Write-Off Patterns a Key Factor in Ratios

BY LOWELL S. BROOM, CPA, DBA

Regarding the article “Assessing the Allowance for Doubtful Accounts” (Sept. 09, page 40): Enjoyed the article. However, it seems to me that another important component of the analysis suggested by the authors would be to determine whether the entity was following a consistent pattern of writing off accounts. If that was not the case, the three ratios calculated would be flawed.

 

One way to test that, it seems to me, would be to calculate the percentage of “old” receivables on hand at the end of each year (however one might choose to define “old”). If the entity was following a consistent pattern of write-offs, that percentage should remain fairly consistent. If the entity was slow to execute write-offs in a given year, that percentage would go up, and the calculation of the ratios suggested by the authors would be affected. Another way of saying that is that the decision on the timing of the write-off of accounts is often arbitrary, and timing differences in implementing such write-offs could greatly affect the comparability of the ratios suggested by the authors. Consequently, it seems important to me that the consistency of the write-off process needs to be evaluated before calculating/interpreting the three ratios suggested by the authors.

 

Lowell S. Broom, CPA, DBA

Birmingham, Ala.

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