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?

A) The loss on disposal of long-term assets is added back to net income in the operating activities section to reflect that it's a non-cash expense.
B) The loss on disposal is subtracted from net income as it represents a reduction in cash flow and is reported as an operating expense.
C) The loss on disposal is reported as a separate line item under financing activities because it pertains to the sale of long-term assets.
D) The treatment of the loss on disposal depends on the specific accounting

Answer 1

In the indirect method of the cash flow statement, a loss on disposal of long-term assets is added back to net income because it's a non-cash expense that did not result in an actual cash outflow.

Step-by-step explanation:

If a company experienced a loss on disposal of long-term assets, this loss would be added back to net income in the operating activities section of the statement of cash flows when using the indirect method.

The reason for this treatment is because the loss is a non-cash charge that reduced net income on the income statement, but did not involve an actual outflow of cash during the period. Therefore, the loss is added back to reconcile net income to the net cash provided by operating activities.