Cash Flow Inquiry
I’ve noticed that my cash flow isn’t aligning with the amount of accumulated depreciation for a disposed asset.
When I reduce the annual depreciation by that amount, the cash flow balances out.
Is this approach correct? Or is there a potential mistake that I might have overlooked?
One response
When you dispose of an asset, the accumulated depreciation associated with that asset should be removed from your books to reflect that the asset is no longer owned. However, adjusting the current year’s depreciation expense to balance your cash flow isn’t the correct approach.
Here’s a more structured breakdown:
Cash Flow Statement: Cash flow from operating activities includes adjustments for non-cash items like depreciation but does not adjust based on asset disposal directly. The cash flow statement should reflect cash inflows and outflows rather than manipulating depreciation to create balance.
Accumulated Depreciation: When you dispose of an asset, you remove its accumulated depreciation account related to that asset. This is a separate Accounting entry that should not affect your current year’s depreciation expense.
Disposal Accounting: When disposing of an asset, you may record a loss or gain on disposal, which should also be reflected in your statements. The cash flow impact would typically be based on the proceeds received from the sale of the asset and any related costs.
Balancing Cash Flow: If by adjusting depreciation it appears like your cash flow balances, it might be masking an underlying issue. It’s important to ensure all components of the cash flow statement are accurately reflecting operational, investing, and financing activities.
In conclusion, adjusting the depreciation to balance cash flow is not a recommended practice. It’s crucial to look at the disposal entries instead and ensure they are accurately recorded to reflect the true financial position and cash flows of your operations. If you’re still unsure, consulting with a financial professional or accountant may help clarify the best approach.