Sir, I have 2 doubts; (1) why we are reducing the irrecoverable debt from cash received. it was already reduced from trade receivables’ closing balance, wasn’t it? (2) why we are adding profit on non-current asset in other cash payment?
1. The irrecoverable debt did indeed reduce the closing balance on receivables. Prepare yourself a receivables t-account and after crediting with the irrecoverable debt, the ‘missing figure’ is the cash received.
2. The cash received was 24,000 but the 6,000 profit had been netted off against expenses
(1) sir but they already given the reduced amount nah? 259000 is reduced amount, isn’t it? (2) I can’t understand the meaning of “netted off against expenses”
What happens is we have a balance b/d of 2,35,000 add on to sales 1,200,000 and receivables increases to 1,435,000, deduct irrecoverable debt of 14,000 because we assume it will not be recovered. Now the remaining amount consists of cash received as well as the balance c/d. In order to find out the the cash received you must deduct the balance c/d, and in order to find balance c/d, cash received should be deducted which is the proper accounting treatment.
Hello, one question: the 6.000(profit) if the example was to continue will be added in the Investing Activities as SALE OF NON – CURRENT ASSET? Or the full amount of $24,000?
It took me a while to understand why bad debt is not included in the statement in the same manner as depreciation. The lecturer says it is not included because it doesn’t affect cash but that isn’t quite right. The effect of the bad debt write off is actually included in the working capital adjustments as Receivables is lowered by the debt being written off. This will reduce the receivables and reduction in receivables ‘adds cash’ in the same way that depreciation does. Commenting to save somebody else the 30mins it took me to sort that out in my mind.
Hi John, appreciate you can further explain on the bad debt write-off. Net profit was reduced due to bad debt write-off, as non cash expense item, so when we work backwards for cash flow, we should add it back, similar to what we did to depreciation. Kindly point out where I got it wrong. Thanks.
I don’t understand the reason why there is no adjustment for irrecoverable debt expense.
It is just my thought, but irrecoverable debt was charged to administrative expenses which reduced profits and yet there was no cash flow resulting from it. So why do we not add back the value of irrecoverable debt expense in the adjustments?
I think that’s because when referring writing off irrecoverable debts, we mean debiting Receivables and Crediting for allowance, which is not recorded as expenses.
there is a chance to buy non-current assets by credit. then why you consider all balance amount as bought by cash in the calculation of non-current assets. kindly explain.
They will indeed probably have been bought on credit. However if any of the purchase price was still owing at the end of the year then this would be included in payables and adjusted when calculating the cash flows from operating activities.
Thank you for the reply, but if it is included in payables then it affects two times in the cash flow statement as cash flows from operating activities and cash flow from investing activities. a non-current asset purchase is not an operating activity, isn’t it?
You are correct in that if the liability had not been paid in full before the year end, then there is in a sense a ‘mis-allocation’ (between operating activities and investing activities). However this is as we are required to do it per the accounting standard.
We deal with it as I do in the lecture (which is following the accounting standard).
daoussays
hi sir, i need explanation if the statement have bad debt written off and inventories written-off should we add or subtract and should we include in the adjustment of operating.
We didn’t subtract them twice. We subtracted them from other expenses because (in the case of debts written off) they were not relevant, and (in the case of employees wages) they are required to be shown separately.
ceci1003says
Sir i didn鈥檛 understand the other expense either, why should we add back profit of the disposal of non current asset? That profit was included in the administration cost? Kindly explain . Thanks a lot
The administration cost will be the net total of all the expenses less the profit on the sale. The profit is not a cash flow and so it needs adding back to find out what the cash expenses were.
Sir, you said that we take out the 42.000 Cash paid to employees and you included it in Other payments and somehow it balanced. We count twice for cash paid to employees?
MOhmammad says
Sir i have a query.
1.Can you please tell why you didn’t add disposal of NCA $24000?
2. Moreover could you please explain why we didn’t add irrecoverable debts written off?
MuhammedSaleem says
Thank u for clearing the doubt sir
John Moffat says
You are welcome.
MuhammedSaleem says
Sir, I have 2 doubts;
(1) why we are reducing the irrecoverable debt from cash received. it was already reduced from trade receivables’ closing balance, wasn’t it?
(2) why we are adding profit on non-current asset in other cash payment?
Please sort out my doubt………
John Moffat says
1. The irrecoverable debt did indeed reduce the closing balance on receivables. Prepare yourself a receivables t-account and after crediting with the irrecoverable debt, the ‘missing figure’ is the cash received.
2. The cash received was 24,000 but the 6,000 profit had been netted off against expenses
MuhammedSaleem says
(1) sir but they already given the reduced amount nah? 259000 is reduced amount, isn’t it?
(2) I can’t understand the meaning of “netted off against expenses”
John Moffat says
1. Yes, 259,000 is the reduced amount. However if you prepare a receivables t-account then you will see what the cash received is.
2. Netted off against expenses means that they have subtracted the profit from the expenses.
Sam6365 says
What happens is we have a balance b/d of 2,35,000 add on to sales 1,200,000 and receivables increases to 1,435,000, deduct irrecoverable debt of 14,000 because we assume it will not be recovered. Now the remaining amount consists of cash received as well as the balance c/d. In order to find out the the cash received you must deduct the balance c/d, and in order to find balance c/d, cash received should be deducted which is the proper accounting treatment.
ainebronteacca says
Why do we assume that all payables are for purchases and not for expenses?
John Moffat says
We don’t (and purchases are an expense).
Ermali says
Hello, one question: the 6.000(profit) if the example was to continue will be added in the Investing Activities as SALE OF NON – CURRENT ASSET? Or the full amount of $24,000?
John Moffat says
The full 24,000 cash received.
Asif110 says
This chapter is quite heavy.
Dear sir,
Why is irrecoverable debt utilized in the direct method, whereas ignored in the indirect method ?
How did it differ from depreciation & profit on sale of non current asset ?
Could you please generously elaborate further on the reason behind its lack of role within the indirect method ?
Jamal868 says
It took me a while to understand why bad debt is not included in the statement in the same manner as depreciation. The lecturer says it is not included because it doesn’t affect cash but that isn’t quite right. The effect of the bad debt write off is actually included in the working capital adjustments as Receivables is lowered by the debt being written off. This will reduce the receivables and reduction in receivables ‘adds cash’ in the same way that depreciation does. Commenting to save somebody else the 30mins it took me to sort that out in my mind.
katniss says
Thanks !! You just made my day and saved me a lot more than half an hour.
tangxin1988 says
Hi John, appreciate you can further explain on the bad debt write-off.
Net profit was reduced due to bad debt write-off, as non cash expense item, so when we work backwards for cash flow, we should add it back, similar to what we did to depreciation.
Kindly point out where I got it wrong. Thanks.
nicyzk says
Hi sir,
I don’t understand the reason why there is no adjustment for irrecoverable debt expense.
It is just my thought, but irrecoverable debt was charged to administrative expenses which reduced profits and yet there was no cash flow resulting from it. So why do we not add back the value of irrecoverable debt expense in the adjustments?
Thank you
lim1224 says
I think that’s because when referring writing off irrecoverable debts, we mean debiting Receivables and Crediting for allowance, which is not recorded as expenses.
yasar89 says
Hi Sir,
there is a chance to buy non-current assets by credit. then why you consider all balance amount as bought by cash in the calculation of non-current assets. kindly explain.
Thank you!
John Moffat says
They will indeed probably have been bought on credit. However if any of the purchase price was still owing at the end of the year then this would be included in payables and adjusted when calculating the cash flows from operating activities.
yasar89 says
Hi Sir,
Thank you for the reply,
but if it is included in payables then it affects two times in the cash flow statement as cash flows from operating activities and cash flow from investing activities.
a non-current asset purchase is not an operating activity, isn’t it?
kindly explain.
thank you
John Moffat says
You are correct in that if the liability had not been paid in full before the year end, then there is in a sense a ‘mis-allocation’ (between operating activities and investing activities). However this is as we are required to do it per the accounting standard.
yasar89 says
Thank you for the reply, sir,
Then, what will be the solution to it?
John Moffat says
We deal with it as I do in the lecture (which is following the accounting standard).
daous says
hi sir, i need explanation if the statement have bad debt written off and inventories written-off should we add or subtract and should we include in the adjustment of operating.
John Moffat says
Neither of them appear anywhere in the statement, and the profit is not adjusted for them.
John Moffat says
I removed it from other payments – I didn’t add it 馃檪
yusifbayli says
hello
Sir l actually don’t understand other expense part. Why we should subtract written off and employees salary twice??
John Moffat says
We didn’t subtract them twice. We subtracted them from other expenses because (in the case of debts written off) they were not relevant, and (in the case of employees wages) they are required to be shown separately.
ceci1003 says
Sir i didn鈥檛 understand the other expense either, why should we add back profit of the disposal of non current asset? That profit was included in the administration cost? Kindly explain . Thanks a lot
John Moffat says
The administration cost will be the net total of all the expenses less the profit on the sale. The profit is not a cash flow and so it needs adding back to find out what the cash expenses were.
Andrei says
Hello,
Sir, you said that we take out the 42.000 Cash paid to employees and you included it in Other payments and somehow it balanced. We count twice for cash paid to employees?