What approaches might Cisco have used to arrive at the $275 million bad debt provision?
There are two ways commonly used to arrive at an estimate of future bad debt, the income statement approach and the balance sheet approach. Using the income statment approach, we estimate bad debt expense as a percentage of each period's net credit sales. The balance sheet approach determines bad debt expense by estimating net realizable value of accounts receivable. In other words, the allowance for uncollectible accounts is determined and bad debt expense is an indirect outcome of adjusting the allowance account to the desired balance.