If bad debt expense as well as change in A/R is provided , do we have to adjust A/R for the bad debt expense or should we assume it is already factored in? - this is for calculating CFO. any ideas? thanks dsyl
Assuming that you are talking about the indirect method, you don’t make adjustments for bad debt expense, ever. You treat it as any other line on the income statement (excluding the always non-cash related depreciation and amortization lines). You just adjust for the changes in net accts rec.
If Net Income is provided in the question, the bad debt would have been factored in the income statement. As such, you would need to add back the non cash item from the net income. Net Income Add (debt expense) add/(sub) decrease/(increase) in AR … …
Thanks guys;pardon me for not thinking this thru ,but I guess it is the same with the direct method?
But isnt bad debt a non cash expense… In case of indirect, dont we subtract it?
smeet Wrote: ------------------------------------------------------- > But isnt bad debt a non cash expense… In case of > indirect, dont we subtract it? The offset entry for bads is the contra account, “allowance for doubtful accounts”, which is netted against accounts receivable. When you make the adjustment for changes in working capital accounts, you pick this up.
Yes what you said makes sense. But when u need to calculate CFO, would you take this into account. I was thinking that since bad debt is estimated and not paid out, it should not be included. OR may be I have understood the wrong thing. The chages in AR already reflect the doubtful expense as a result we need to add it back.
smeet - Just as some of your CGS may not have actually been paid in cash and it is adjusted under the indirect method of calculating CFO when you add/subtract chnages in working capital accounts (inventory and accts payable for CGS) the same is true for sales and bad debt expense, which both get run thru net accts receivable.