Question

Would an increase tax payable or allowance for doubtful accounts has increased and gross accounts receivable remains the same make net income exceed operating cash flows at year end

Answer 1

An allowance for doubtful accounts is a contra-asset account that nets against the total receivables presented on the balance sheet to reflect only the amounts expected to be paid. The allowance for doubtful accounts is only an estimate of the amount of accounts receivablewhich are expected to not be collectible. The actual payment behavior of customers may differ substantially from the estimate.

• The allowance for doubtful accounts is a contra-asset account that records the amount of receivables expected to be uncollectible.
• The allowance is established in the same accounting period as the original sale, with an offset to bad debt expense.
• The percentage of sales method and the accounts receivable aging method are the two common ways to estimate uncollectible accounts.

Reporting Cash Flows from Operating Activities

An enterprise should report cash flows from operating activities using either:
(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

(b) the indirect method, whereby net profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

The direct method provides information which may be useful in estimating future cash flows and which is not available under the indirect method and is, therefore, considered more appropriate than the indirect method. Under the direct method, information about major classes of gross cash receipts and gross cash payments may be obtained either:
(a) from the accounting records of the enterprise; or
(b) by adjusting sales, cost of sales (interest and similar income and interest expense and similar charges for a financial enterprise) and other items in the statement of profit and loss for:

i) changes during the period in inventories and operating receivables and payables;

ii) other non-cash items; and
iii) other items for which the cash effects are investing or financing cash flows.