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alohachris

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How do asset impairments effect the cash flow statement?


If land or houses built and in inventory are impaired and "written down" to mkt value which reduces profit on the P&L as an expense or charge, why does this figure end up as an increase on the cash flow statement?

Its a non-cash event is it not? Example: if you write down the value of land and a house (you're a builder) for $50,000 due to fallen prices, why does this $50,000 charge end up as an increase to the cash account and improve the cash flow statement?

Obviously, I'm not an accountant and this seems very counter intuitive. If what I described is correct, you do not have an additional $50,000 in your bank account to spend.

What am I missing?

538 day(s) ago

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TaxesandScotch 		You are looking at an indirect income statement. The indirect method begins with Net Income, and works backwards to get to cash flow, as opposed to the direct method, which lists out all sources and uses of cash.

You are correct in that the 50k charge shows up on the income statement as part of net income. You are also correct that it is a non-cash event.

So your net income has a 50k reduction to it that isn't also a reduction in cash. In order to go from NI to CFO, then, you have to add that 50k back.

Simple example: The only thing the firm does in the year is write down that 50k - it does nothing with cash at all. So it's net income is (50,000) (ignore taxes), and its operating section of the statement of cash flows looks like this:

NI:............................................................................... (50,000)
+ Asset Impairment ................50,000
Cash flows from Operations ........... 0

Posted 538 days ago

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