Final answer:
A bad debt expense estimate affects the net income, net realizable value (NRV), and cash flows of a company.
Step-by-step explanation:
When a company estimates a bad debt expense, it affects the net income, net realizable value (NRV), and cash flows.
1. Net Income: The bad debt expense reduces the net income of a company. It is recorded as an expense on the income statement, reducing the overall profit. This is because the company expects that some of its customers will not be able to repay their debts, and it accounts for those potential losses.
2. Net Realizable Value (NRV): NRV is the estimated selling price of accounts receivable minus the estimated bad debt expense. When the bad debt expense estimate increases, it reduces the NRV, as it reflects a higher potential loss from uncollectible accounts.
3. Cash Flows: The bad debt expense estimate indirectly affects cash flows. When the estimate is higher, it implies a greater amount of potential bad debts and reduces the cash inflow that the company expects to receive from its customers.