Question

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?No effect/ increaseIncrease/ No effectDecrease/ No effectIncrease/ Decrease

Answer 1

D: No effect, Increase

Step-by-step explanation:

Allowance for bad debt does not affect cash flow statement since it does not involve the movement of cash. However, it affects operating income in the income statement in accrual accounting. Hence if the allowance is reduced from 2% to 1%, the income for the year will rise.