CFA Practice Question
Impairment loss ______
II. reduces income.
III. reduces cash flows from operating activities.
IV. is typically considered non-recurring.
I. reduces long-term assets.
II. reduces income.
III. reduces cash flows from operating activities.
IV. is typically considered non-recurring.
Correct Answer: I, II and IV
Impairment loss is a non-cash item and needs to be added back to the net income to get cash flows from operating activities (when using the indirect method).
User Contributed Comments 6
| User | Comment |
|---|---|
| Moses3 | no effect on cf |
| johntan1979 | Non-cash items are added back to NI in CFO, hence, increasing CFO. |
| geofin | Would taxes be lower because of lower reported income? In this case, CFO will be higher... |
| namuhama | I believe taxes are not affected until impairment is realized/sold. Thus, it creates a Deferred Tax Account to the amount of the impairment loss. Please correct me if I'm wrong. |
| UcheSam | @namuhama, you are correct. @johntan1979 adding impairment loss to NI does not increase CFO. it only neutralizes its initial deduction from NI as it is a non-cash item. |
| VazquezCol | @Moses3 The impairment loss would increase expenses for the year is made, therefore reducing earnings before taxes and in consequence reducing the amount of tax payable. In that case, that may increase the Operating Cash Flows, since taxes paid will be lower. So an impairment may have a positive effect on OCF, as mentioned by @geofin |