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?

Short 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-by-step solution

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 accountwhich means net income is reduced by loss amount.

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.