Question

Assume Mercy Hospital underestimated the provision for bad debts and contractual adjustments reported on its December 31, 2015 income statement. This was caused by a new accountant calculating the accounts receivable balance at the end of the year. What would be the most likely effect on the actual cash flow stemming from the reported net patient service revenue in the following year?

Answer 1

Answer:

If the hospital underestimated its bad debt, that means that they are overestimating their profits. The cash flow is determined using the income statement, so it will also be overestimated. But at some point reality will catch up and the actual cash flow will be less than expected, since bad debts reduce actual revenue.