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Dear sir,
in the cash flow statement example 7 from the notes, why are bad debts not added back to profit while calculating cash from operating activities? Bad debts do not involve any flow of cash, so when they are deducted from gross profit to calculate operating profit, why do we not add them back in cfs?Using the indirect method, the existence and occurrence of bad debts is automatically adjusted for by taking the increase/ decrease in the receivables balance and, of course, this is done within the operating activities section of the cash flow.
In an exam question, the examiner will not even tell you about the incidence of bad debts having been written off during the year. The only time that you will see bad debts in a cash flow accounting question is when it’s a direct method question ….. and they haven’t appeared in F7 since Adam was a lad!
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