Florida General Contractor Practice Exam

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How is the bad debt ratio calculated?

Total bad debts divided by total sales
Net income divided by total assets
Total assets divided by total liabilities
Gross profit divided by total revenue

The correct answer is: Total bad debts divided by total sales

The method for calculating the bad debt ratio is based on taking the total amount of bad debts and dividing it by total sales. This ratio provides insight into the proportion of a company's sales that are deemed uncollectible. A higher bad debt ratio indicates that a larger portion of sales is not expected to be collected and can signal potential issues with credit management or customer payment behavior. By analyzing this ratio, a company can assess its credit risk and make informed decisions about extending credit to customers in the future. It can also help in forecasting cash flow based on the anticipated level of uncollectable accounts. The other methods listed in the choices pertain to different financial metrics and do not measure the proportion of uncollected debts relative to sales, which is the core of the bad debt ratio.