Introduction:
Sears Holdings Corporation was one of the largest retail companies in the United States. In 2017, the company had a net loss of $2.2 billion, marking the company’s twelfth consecutive year of net losses. One of the contributing factors to Sears’ financial troubles was its accounting practices. Specifically, Sears was criticized for its treatment of uncollectible accounts, which are accounts that are unlikely to be paid by customers. This case study will analyze the issue of Sears’ accounting for uncollectible accounts, and provide recommendations for improvement.
Case Issue:
Sears was criticized for its accounting practices related to uncollectible accounts. Specifically, Sears was accused of overestimating the collectability of its accounts receivable, which led to overstated financial statements. Sears’ accounting practices for uncollectible accounts were called into question after the company’s announcement of a large increase in its allowance for uncollectible accounts. The announcement resulted in a significant decline in Sears’ stock price, and sparked concerns among investors about the company’s financial health.
Case Analysis:
Sears’ accounting for uncollectible accounts was not in compliance with generally accepted accounting principles (GAAP). GAAP requires that companies estimate the amount of uncollectible accounts and record a corresponding allowance for doubtful accounts. Sears had been criticized for underestimating the amount of uncollectible accounts, which resulted in overstated financial statements. In 2017, Sears announced that it would increase its allowance for uncollectible accounts by $181 million. The announcement led to a significant decline in the company’s stock price, which raised concerns among investors about the company’s financial health.
The increase in Sears’ allowance for uncollectible accounts was significant, and it suggested that the company had been underestimating the amount of uncollectible accounts. Sears’ accounting for uncollectible accounts was not in compliance with GAAP, which requires companies to make a reasonable estimate of the amount of uncollectible accounts and record a corresponding allowance for doubtful accounts. Sears’ failure to accurately estimate the amount of uncollectible accounts resulted in overstated financial statements, which misled investors about the company’s financial health.
Conclusion:
Sears’ accounting for uncollectible accounts was not in compliance with GAAP, and it resulted in overstated financial statements. The company’s failure to accurately estimate the amount of uncollectible accounts misled investors about the company’s financial health. Sears’ accounting practices for uncollectible accounts were criticized by investors and analysts, and they contributed to the company’s financial troubles.
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Recommendations:
To improve its accounting for uncollectible accounts, Sears should ensure that its estimates of uncollectible accounts are reasonable and based on historical experience. The company should also regularly review and update its estimates of uncollectible accounts to reflect changes in the economic environment. Additionally, Sears should ensure that its accounting practices for uncollectible accounts are in compliance with GAAP. By improving its accounting for uncollectible accounts, Sears can provide investors with more accurate financial statements and restore confidence in the company’s financial health.
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