Question

During 2014, Osborn Corporation, which uses the allowance method of

accounting for doubtful accounts, recorded a provision for bad debt expense of $75,000 and in addition it wrote off, as uncollectible, accounts receivable of $23,000. As a result of these transactions, net cash provided by operating activities would be calculated (indirect method) by adjusting net income with a(n):
A. $23,000 increase.
B. $52,000 increase.
C. $52,000 decrease.
D. $75,000 increase.

Answer 1

The correct answer is D. a $75,000 increase because the provision for bad debt is a non-cash expense and should be added back to net income, while the write-off itself does not affect the cash flow.

Step-by-step explanation:

During 2014, when Osborn Corporation recorded a provision for bad debt expense of $75,000 and wrote off accounts receivable of $23,000, the correct calculation for the adjustment to net income in the net cash provided by operating activities using the indirect method would be option D. a $75,000 increase.

The provision for bad debts is a non-cash expense and would be added back to the net income when preparing the cash flow statement using the indirect method. The actual write-off of accounts receivable does not affect the cash flow, as it merely adjusts the accounts receivable and allowance for doubtful accounts on the balance sheet without any cash movement.