Q8RQ - Horngren'S Financial And Managerial Accounting

Question

Question: If a company experienced a loss on disposal of long-term assets, how would this be reported in the operating activities section of the statement of cash flows when using the indirect method? Why?

Step-by-Step Solution

Answer

Answer

 

Any loss on disposal of long-term assets should be added back to the net income in the operating activities section of the statement of cash when using indirect method.

Step 1: Loss on disposal of long-term assets

If there is a loss on disposal of long-term assets then such loss is debited to the statement of profit and loss account which means net income is reduced by loss amount.

Step 2: Loss on disposal of long-term assets should be added back to the net income

Sale of long-term asset is an investing activity hence it should be adjusted under the heading cash flows from investing activity. Therefore, loss on disposal of long-term assets is added back to the net income in the operating activities section of the statement of cash flows when using direct method.