CFA Practice Question

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CFA Practice Question

Impairment loss ______

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
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