finance

1. Is the company likely to run a high credit risk?
• Recall from seminar 2 that ABF has significant retail operations. Credit risk?
• ABF has significant food manufacturing operations. Who are the most likely
customers? Credit risk?
• How does the company manage its credit risk?

2. Is the company likely to run a high credit risk?
• Recall from seminar 2 that ABF has significant retail operations. These are not
likely to involve credit risk.
• ABF has significant food manufacturing operations. Who are the most likely
customers? Food retailers: are they likely to have liquidity issues (not being able
to settle current liabilities to suppliers?). Not likely.
• The company appears to manage credit risk quite closely and have significant
experience with its customers.

3. Building the Allowances for doubtful accounts
 Bad debt expense: “ Increase charged to the income statement”
 Reversal of allowance, decreasing the allowance and generating an income item on the
income statement (typically aggregated with the expense above): “Amounts released”
 Receivables that will never be received, therefore written off against the allowance:
“Amounts written off”

4. Building the Allowances for doubtful accounts
 In 2019, the company had an opening balance of £23m, which has been used to write
off £3m. At the same the company decided to release another £3m in the income
statement as an income (23-3-3=17).
 To build a closing balance of £24m, the company had to incur an expense of £7m
(17+7=24).

5. Building the Allowances for doubtful accounts
 Does the company need an allowance of £24m?

6. Building the Allowances for doubtful accounts
 The question that arises is whether the company needs an allowance of £24m. It can be
seen that the opening balance of allowances £23m could cover easily the write off of
£3m. In addition, given the narrative in the note, the customer base of the company has
a low credit risk: tights checks are conducted and the company has a long history with
its customers (note: retail customers do not bring about credit risk as they pay cash).
 Very conservative allowances (23/3>1). Does the company build a “cookie jar” for
years when any of its lines of activities may underperform?