Question

Recently, Galaxy Corporation lowered its allowance for doubtful accounts by reducing bad debt expense from 2% of sales to 1% of sales. Ignore taxes. What are the immediate effects on operating income

Answer 1

Lower bad debt expenses will result in higher operating income. The corporation operating cash flow is actually not affected until Galaxy actually collects the receivables.

In this case:

- The effect on Operating income would be High

- The effect on Operating cash flows is No effect