Question

How does an asset impairment loss impact a company's financial statements?

1) Raises expenses and lowers both revenue and net income.
2) Lowers assets, stockholders' equity, and net income.
3) Raises expenses and lowers net income with no effect on any other items.
4) Raises liabilities and lowers stockholders' equity.
5) Lowers assets and increases stockholders' equity.

Answer 1

An asset impairment loss lowers assets, stockholders' equity, and net income by reducing the book value of the impaired asset, decreasing retained earnings, and recognizing an expense in the income statement.

Step-by-step explanation:

The question asks how an asset impairment loss impacts a company's financial statements. An asset impairment loss occurs when the fair market value of an asset drops below its book value on the balance sheet. Recognition of an impairment loss will have the following effects: it will lower assets on the balance sheet because the book value of the impaired asset is reduced; it will decrease stockholders' equity because net income is part of retained earnings, which is a component of equity; and it will reduce net income for the current period as the impairment loss is recognized as an expense in the income statement. Therefore, the correct answer is that an impairment loss lowers assets, stockholders' equity, and net income.