Question

Does a loss on sale of equipment or impairment loss reduce operating cash flows

Answer 1

Loss on sale of equipment occurs when assets get sold lesser than its book value and an impairment loss is recognized when the fair value of assets becomes less than the book value of the asset. The difference between the fair value of the asset and book value of an asset is known as an impairment loss

When we compute Cash flows from operating activities using the indirect method

We basically add back loss on the sale of equipment or impairment loss to net income as they are non-cash items. Which we consider only in net income as the income statement is prepared on the accrual basis of accounting. While in the cash flow statement, we consider cash items only.

So, if we conclude loss on the sale of equipment or impairment loss doesn't reduce operating cash flows as here no cash transaction actually occurs that's why we also add back these items in cash flow statement (indirect method)