UV1120

MGM MIRAGE—ACCOUNTS RECEIVABLE

Company Description

MGM Mirage is one of the largest gaming companies in the world. It owns,
operates, and has investments in almost 30 casino–resorts in the United States that offer
gaming, hotel, dining, entertainment, retail, and other resort amenities.

Attachments

Exhibit 1a: Accounts receivable footnote from 2004 Annual Report

Exhibit 1b: Excerpt from footnote on significant accounting policies from 2004 Annual
Report
Exhibit 2: Excerpt from Management’s Discussion and Analysis from 2004 Annual
Report
Exhibit 3: Consolidated statements of income from 2004 Annual Report
Exhibit 4: Consolidated balance sheets from 2004 Annual Report

Assignment

Refer to the exhibits regarding accounts receivables taken from MGM Mirage’s
2004 Annual Report to answer the following questions.

1. Refer to the table of data related to “casino accounts receivable” shown in Exhibit 2.
Is the 2004 casino accounts receivable balance of $174,713 thousand the gross or net
casino accounts receivable? How do you know?
2. Assume that 95% of the provision for doubtful accounts on the income statement for each
of 2004, 2003, and 2002 relates to casino receivables.
a. Estimate the amount of net writeoffs (i.e., writeoffs less recoveries) in 2004 and
2003.

This case was prepared by Associate Professor Luann J. Lynch. It was written as a basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Copyright  2006 by the University
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b. What was the impact on the company’s 2004 and 2003 balance sheets and
income statements from recording these writeoffs?
3. Assume that 40% of “casino revenues” were made on account in each of 2004, 2003,
and 2002. Compute the amount of cash collections related to “casino accounts
receivable” during 2004 and 2003.
4. Why did MGM Mirage record a negative provision for doubtful accounts in 2004?
5. The table of data related to casino accounts receivable shown in Exhibit 2 shows the
allowance as a percentage of casino accounts receivable, the median age of casino
accounts receivable, and the percentage of casino accounts receivable over 180 days
decreasing. How does that compare to the trends in bad debt expense and writeoffs?
What might explain that trend?

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Exhibit 1a
MGM MIRAGE—ACCOUNTS RECEIVABLE
Accounts receivable footnote from 2004 Annual Report for MGM Mirage

NOTE 4—ACCOUNTS RECEIVABLE, NET

Accounts receivable consisted of the following:

At December 31 (In thousands) 2004 2003

Casino .......................................................... $ 174,713 $ 159,569
Hotel ............................................................ 61,084 36,376
Other ........................................................... 28,114 22,617
263,911 218,562
Less: Allowance for doubtful accounts ............ (59,760) (79,087)
$ 204,151 $ 139,475

Exhibit 1b
MGM MIRAGE—ACCOUNTS RECEIVABLE
Excerpt from footnote on significant accounting policies
from 2004 Annual Report for MGM Mirage

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

AND BASIS OF PRESENTATION

Accounts receivable and credit risk. Financial instruments that potentially subject the
Company to concentrations of credit risk consist principally of casino accounts receivable. The
Company issues markers to approved casino customers following background checks and
investigations of creditworthiness. At December 31, 2004, a substantial portion of the
Company’s receivables were due from customers residing in foreign countries. Business or
economic conditions or other significant events in these countries could affect the collectibility
of such receivables.

Trade receivables, including casino and hotel receivables, are typically non-interest bearing
and are initially recorded at cost. Accounts are written off when management deems the
account to be uncollectible. Recoveries of accounts previously written of are recorded when
received. An estimated allowance for doubtful accounts is maintained to reduce the Company’s
receivables to their carrying amount, which approximates fair value. The allowance is
estimated based on specific review of customer accounts as well as historical collection
experience and current economic and business conditions. Management believes that as of
December 31, 2004, no significant concentrations of credit risk existed for which an allowance had not
already been recorded.

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Exhibit 2
MGM MIRAGE—ACCOUNTS RECEIVABLE
Excerpt from Management’s Discussion and Analysis from 2004 Annual Report
Allowance for Doubtful Casino Accounts Receivable

Marker play represents a significant portion of the table games volume at Bellagio, MGM
Grand Las Vegas, and The Mirage. Our other facilities do not emphasize marker play to
the same extent, although we offer markers to customers at those casinos as well.

We maintain strict controls over the issuance of markers and aggressively pursue
collection from those customers who fail to pay their marker balances timely. These
collection efforts are similar to those used by most large corporations when dealing with
overdue customer accounts, including the mailing of statements and delinquency notices,
personal contacts, the use of outside collection agencies and civil litigation. Markers are
generally legally enforceable instruments in the United States. At December 31, 2004 and
2003, approximately 54% and 53%, respectively of our casino accounts receivable was
owed by customers from the United States. Markers are not legally enforceable
instruments in some foreign countries, but the United States assets of foreign customers
may be reached to satisfy judgments entered in the United States. A significant portion of
our casino accounts receivable is owed by casino customers from the Far East. At
December 31, 2004 and 2003, approximately 25% and 30%, respectively, of our casino
accounts receivable was owed by customers from the Far East.

We maintain an allowance, or reserve, for doubtful casino accounts at all of our operating
casino resorts. The provision for doubtful accounts, an operating expense, increases the
allowance for doubtful accounts. We regularly evaluate the allowance for doubtful casino
accounts. At resorts where marker play is not significant, the allowance is generally
established by applying standard reserve percentages to aged account balances. At resorts
where marker play is significant, we apply standard reserve percentages to aged account
balances under a specified dollar amount and specifically analyze the collectibility of each
account with a balance over the specified dollar amount, based on the age of the account,
the customer's financial condition, collection history and any other known information. W
also monitor regional and global economic conditions and forecasts to determine if reserve
levels are adequate.

The collectibility of unpaid markers is affected by a number of factors, including changes

in currency exchange rates and economic conditions in the customers' home countries.
Because individual customer account balances can be significant, the allowance and the
provision can change significantly between periods, as information about a certain
customer becomes known or as changes in a region's economy occur.

The following table shows key statistics related to our casino receivables:

Year Ended December 31 (In thousands) 2004 2003 2002

Casino accounts receivable .................................................. $174,713 $159,569 $166,612
Allowance for doubtful casino accounts receivable ............. 57,111 75,265 85,504
Allowance as a percentage of casino accounts receivable.... 33% 47% 51%
Median age of casino accounts receivable ........................... 33 days 43 days 50 days
Percentage of casino accounts outstanding over 180 days ... 15% 23% 27%

The allowance for doubtful accounts as a percentage of casino accounts receivable has
decreased since 2002, the result of improved collections leading to improved credit
statistics, reflected in the lower median age of accounts and decreasing percentage of
accounts outstanding over 180 days. Our reserve percentage is now consistent with the
percentage before the September 11 attacks, and is representative of a more normalized
collection experience and positive global economic conditions relative to the conditions in
2001 and 2002.

At December 31, 2004, a 100 basis-point change in the allowance for doubtful accounts as
a percentage of casino accounts receivable would change net income by $1.1million, or
$0.01 per share.

This document is authorized for use only in Xin Cheng's Financial Accounting 2021 at Renmin University of China from Sep 2021 to Mar 2022.
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MGM MIRAGE—ACCOUNTS RECEIVABLE

Exhibit 3
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This document is authorized for use only in Xin Cheng's Financial Accounting 2021 at Renmin University of China from Sep 2021 to Mar 2022.
UV1120

MGM MIRAGE—ACCOUNTS RECEIVABLE

Exhibit 3
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This document is authorized for use only in Xin Cheng's Financial Accounting 2021 at Renmin University of China from Sep 2021 to Mar 2022.