During 2020, Olivier Corp., which uses the allowance method of accounting for doubtful accounts, recorded bad debts expense of $ 25,000. As well, the corporation wrote off uncollectible accounts receivable of $ 9,000. As a result of these transactions, their cash flows from operating activities would be calculated (indirect method) by adjusting net income with a
A) $ 25,000 increase.
B) $ 9,000 increase.
C) $ 16,000 increase.
D) $ 34,000 decrease.

Question

Quizplus · Accepted Answer

Recording bad debts expense of $25,000 using the allowance method does not affect cash flows, as it is a non-cash expense. Therefore, when using the indirect method to calculate cash flows from operating activities, this amount is added back to net income.