Impairment Loss on Cash Flow Statement
Impairment loss is the process which a company reduces its fixed assets carrying amount from the balance sheet. It happens when the company’s fair value decreases below the balance on financial statements.
The company records fixed assets based on the acquisition cost, and subsequently, they will adjust based on the depreciation or impairment expense. It depends on the fixed assets policy that the company uses.
When the company fixed assets value decrease significantly, they require to adjust the book value to a suitable level. The impairment loss happens due to various reasons such as market change, damage, and other factors.
The impairment loss will increase the expense on the income statement and reduce the fixed asset balance on balance sheet.
The journal entry is debiting impairment loss and credit accumulated impairment loss.
|Accumulated Impairment Loss
The impairment loss will be recorded as the expense on the income statement. It also reduces the fixed assets balance to the market value.
Cash Flow Statement
Cash flow statement is one of the company’s financial statements which presents the cash movement in the financial period. It shows the cash at the beginning of the period, cash inflow, cash outflow, and the remaining cash at the end of the period.
The cash flow within the company arises from three activity which includes operating, investing, and financing.
Operating activity represents the cash flow that happens due to the main business activity of the company. Cash inflow arrives from cash collected from sale revenue, cash outflow happens due to the payments related to the cost of goods sold, and other operating expenses.
Investing activity summarizes all the cash in and out which happens related to the company’s investment in fixed assets, financial security, and other forms of investment. The cash outflow results from the purchase of investments such as fixed assets, investment property, bonds, and share capital of other companies, and so on. The cash inflow comes from the sale of these assets.
Financing activities include all the cash paid and generate from the funding of the company. The company can raise money by issuing bonds, share capital, and loans from banks or creditors. The company has to pay cash to settle the loan, bond, and repurchase the share capital.
Impairment loss on Cash Flow Statement
The impairment loss will impact the cash flow from operating activities.
Based on the indirect method, the cash flow will start from company’s net profit and adjust for the non-cash transaction.
The impairment loss is the expense recorded on the income statement. It reduces the company’s profit, but there is no cash flow happens. The company does not pay any cash to reflect this expense. It is just the movement of fixed assets balance to expense.
So the impairment loss has to add back to the cash flow statement to reflect the real cash flow.
|– Impairment Loss
|Change in working capital
|– Increase of working capital
|– Decrease of working capital
|Net Cash flow from Operating Activity
The impairment has to add back to increase cash flow as it was decreased on the income statement.