Cash Flow
My cash flow isn’t balancing due to the accumulated depreciation of a disposed asset.
When I reduce this year’s depreciation by that amount, the cash flow balances out.
Is this the correct approach, or is there an error that I might be overlooking?
One response
When you dispose of an asset, you need to consider the accumulated depreciation associated with that asset when calculating cash flow and the impact on your financial statements. Here’s a breakdown of the points to consider:
Accumulated Depreciation: When you dispose of an asset, its accumulated depreciation should be removed from the books alongside the asset itself. This means that the disposal will have an impact on both your Income Statement and your Balance Sheet.
Cash Flow Statement: In the cash flow statement, you adjust net income for non-cash items such as depreciation. When assets are disposed of, you need to ensure that you reflect the loss or gain from that disposal, which can impact your cash flow. Essentially, you should not simply reduce the depreciation for the year by the amount of the accumulated depreciation of the disposed asset without considering if there was a loss or gain on the disposal.
Correct Treatment: It’s not typically correct to reduce your depreciation expense for the year by the amount of accumulated depreciation on the disposed asset. Instead, you should remove the asset value and its accumulated depreciation from your books, and then reflect any gain or loss on disposal if applicable. Your cash flow should show only the cash impact from selling the asset, not adjustments to the depreciation expense.
Possible Mistakes: If your cash flow is not balancing, ensure you are:
In summary, check your calculations regarding the disposal transaction to ensure you’re Accounting for all necessary elements correctly. If the cash flow balances when you reduce the depreciation, it may indicate a miscalculation or oversight elsewhere, so be sure to review all aspects of the transaction.