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November 11, 2020 at 4:35 pm
This chapter is quite heavy.
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 ?
October 24, 2020 at 3:55 pm
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.
June 11, 2020 at 2:46 pm
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.
October 22, 2019 at 10:30 am
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?
January 13, 2020 at 12:36 pm
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.
October 14, 2019 at 8:01 pm
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.
John Moffat says
October 15, 2019 at 7:30 am
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.
October 15, 2019 at 7:20 pm
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?
October 16, 2019 at 8:16 am
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.
October 18, 2019 at 5:23 pm
Thank you for the reply, sir,
Then, what will be the solution to it?
October 19, 2019 at 9:25 am
We deal with it as I do in the lecture (which is following the accounting standard).
October 1, 2019 at 10:46 am
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.
October 1, 2019 at 3:17 pm
Neither of them appear anywhere in the statement, and the profit is not adjusted for them.
January 18, 2019 at 3:46 pm
I removed it from other payments – I didn’t add it 🙂
April 15, 2019 at 10:32 am
Sir l actually don’t understand other expense part. Why we should subtract written off and employees salary twice??
April 15, 2019 at 3:54 pm
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.
July 2, 2019 at 8:54 pm
Sir i didn’t 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
July 3, 2019 at 7:57 am
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.
January 18, 2019 at 1:24 pm
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?
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