Question

Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from 2% of sales to 1% of sales. Ignore taxes. a. What are the immediate effects on operating income? bad debt expense will result in operating income. b. What are the immediate effects on operating cash flow? bad debt expense will have operating cash flow.'

Answer 1

(a) Operating income will increase.

(b) Effect on the operating cash flow is an increase.

Step-by-step explanation:

The answers above depend on the volume of sales, if a comparative analysis is done. If volume of credit sales was low when the rate was 2%, and now that it is reduced the credit sales increases significantly, the bad debt expense in this cash might be minutely different.

Definitely, operating income and operating cash flows will increase in absolute terms since lower bad debt expense rate is applied on credit sales.