Atlanta Inc. recently decided to lower its budget for doubtful accounts by dropping bad debt expense...
Atlanta Inc. recently decided to lower its budget for doubtful accounts by dropping bad debt expense from 2% of sales to 1% of sales. Ignoring taxes, what are the direct effects of this decision on firms' operating cash flow and operating income respectively?
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No effect/ increase |
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Increase/ No effect |
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Decrease/ No effect |
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Increase/ Decrease |
Homework Answers
Option (a) is correct
When the bad debt expense is reduced from 2% to 1% of sales then it will have no effect on operating cash flow and it will increase the operating income.
There will be no effect on operating cash flow because bad debt expense is a non cash item / expense and non cash items do not affect the operating cash flows.
Operating income will be increased by decreasing bad debt expense because bad debt expense is a charge against the income, so when bad debt expense is decreased, it will increase the operating income.
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