Treatment of Bad Debts Recovered in Cash Flow Statement

Bad debts refer to the amounts owed to a business by its customers that are unlikely to be repaid. When such debts are recovered, they are considered as cash inflows in the cash flow statement. The treatment of bad debts recovered in the cash flow statement is as follows:

1. Operating Activities

Bad debts recovered are considered as operating cash inflows in the cash flow statement. They are included in the operating activities section of the cash flow statement as they relate to the primary activities of the business.

2. Direct Method

If the direct method is used to prepare the cash flow statement, bad debts recovered are shown as a separate line item in the operating activities section. The amount recovered is added to the net cash provided by operating activities to arrive at the total cash inflow from operating activities.

3. Indirect Method

If the indirect method is used to prepare the cash flow statement, bad debts recovered are added back to the net income in the operating activities section. This adjustment is made because bad debts are considered as an expense in the income statement, and their recovery is not reflected in the net income. The adjustment results in an increase in the net cash provided by operating activities.

Conclusion

In conclusion, bad debts recovered are treated as cash inflows in the cash flow statement and included in the operating activities section. The treatment of bad debts recovered depends on the method used to prepare the cash flow statement. If the direct method is used, bad debts recovered are shown as a separate line item, while in the indirect method, they are added back to the net income.