Does Writing Off Fixed Assets Affect the Cash Flow Statement?

Writing off fixed assets affects a statement of cash flows that financial managers prepare under the indirect method. Accounting regulations -- especially those coming from the U.S. Securities and Exchange Commission and the Financial Accounting Standards Board -- tell companies how to periodically appraise and write off fixed resources.

Basics

A fixed asset is a resource a company will use in its operating activities for more than 12 months. Given this time expanse, investors often view the purchase of a fixed asset as a sign of competitive optimism from a company's top leadership. Finance people use the terms "fixed asset," "tangible resource," "capital asset" and "physical resource" interchangeably. Examples include commercial establishments -- such as airports, shopping malls and office buildings -- land, residential dwellings and computer gear. Writing off a fixed asset means bringing the resource's worth down to zero and taking it off corporate books.

Cash Flow Statement

A cash flow statement provides a glimpse into three types of monetary movements: cash flows from operating activities, investment initiatives and financing activities. A company's leadership continually reviews a statement of cash flows -- the other name for a cash flow statement, as liquidity report -- to figure out how much money goes out of operating vaults, how much comes in, and how the business is doing overall from a solvency perspective. The last analytical exercise ensures that in-house treasurers know at a given moment how much cash is in corporate coffers so management can make an informed decision about whom to pay and whose payable can wait until the next remittance cycle.

Effect

When an organization writes off a fixed asset, a bookkeeper debits the "loss on asset write off" account -- which accountants often classify in the "unusual losses" category -- and credits the corresponding tangible asset account. The loss account affects the company's income statement, the financial data summary that chronicles corporate profits and losses. "Loss on asset write off" also has an impact on a liquidity report because accountants add it back to net income when preparing a statement of cash flows under the indirect method. This is because the company incurs a loss, but doesn't pony up any cash for it the way it does for charges such as rent and salaries.

Financial Reporting

In addition to a cash flow statement, taking a capital resource off a company's books affects other financial statements. Fixed assets are integral to a statement of financial position, also known as a balance sheet. Therefore, the write-off triggers a numerical dent in the organization's overall balance sheet data. It also affects the corporate equity statement because a loss reduces accumulated profits, which ultimately flow into the report on changes in shareholders' equity.

References

About the Author

Marquis Codjia is a New York-based freelance writer, investor and banker. He has authored articles since 2000, covering topics such as politics, technology and business. A certified public accountant and certified financial manager, Codjia received a Master of Business Administration from Rutgers University, majoring in investment analysis and financial management.