Guys- general question. Should bad debt expense be added back as a non-cash expense when calculating operating cash flow? We have an entity that accounts for bad debt using allowance for doubtful accounts, then expenses the bad debt through the income statement. I’m trying to deduce what the real operating cash flow should be. Thanks, Keith Rochelli, CFA
The answer is no. Lots of expenses on your P&L may be non-cash. Under the indirect method you correct for these items by looking at changes in asset and liabilty accounts. When you adjust for net change in net receivables you correct for both the noncash changes of revenue as well as the non-cash portion of the changes in the allowance.