Cash flow

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1. When dealing with cash flow and the disposal of assets, it’s important to understand how accumulated depreciation and disposal impacts financial statements.

   1. Accumulated Depreciation: This is a contra asset account that reduces the book value of an asset over time. When you dispose of an asset, you also remove its accumulated depreciation from the books.

   2. Cash Flow Statement: The cash flow statement reflects cash generated or used during a specific period. When you dispose of an asset, the cash inflow (if any) from the sale of that asset should be recorded as cash flow from investing activities.

   3. Balancing Cash Flow: If your cash flow isn’t balancing because of the accumulated depreciation relating to a disposed asset, it’s likely because you have not accounted for the cash effect of that disposal correctly.

   If you are reducing your depreciation expense for the year by the amount of accumulated depreciation associated with the disposed asset solely to balance cash flow, that would not be correct.

   Here’s the right approach:

   • When disposing of an asset, you should remove the asset and its related accumulated depreciation from your balance sheet.
   • If there was a gain or loss on the disposal (i.e., how much you received for the asset vs. its net book value), that also needs to be reflected appropriately.
   • The cash received from the disposal should be accurately included in your cash flow statement under investing activities.

   In summary, you should not adjust depreciation in that way to balance your cash flow. Instead, ensure that the disposal of the asset is properly accounted for on your financial statements, including the cash received from the sale. If your cash flow still doesn’t balance after this, you may want to look for other discrepancies in your cash flow statement.

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