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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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In a statement of cash flows (indirect method), the amortization of patents of a company with substantial operating profits should be presented as a(n):

  1. a. cash flow from investing activities
  2. b. cash flow from financing activities
  3. c. deduction from net income
  4. d. addition to net income

To determine

Identify the correct option for the amortization of patents with substantial operating profit to be presented in statement of cash flow by indirect method.

Explanation

Statement of cash flows: Cash flow statement reports all the cash transactions which are responsible for inflow and outflow of cash, and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.

Amortization: Amortization is a process in which the cost of intangible assets is spread equally over the limited or definite useful life of asset.

Indirect method: Under indirect method, net income is reported first, and then non-cash expenses, losses from fixed assets, and changes in opening balances and ending balances of current assets are adjusted to reconcile the net income balance.

Justification for correct answer:

Option d. During the preparation of statement of cash flow in indirect method the amortization of patent has to be added to the net income, as it is similar to the depreciation on fixed asset. It is a non-cash expense added back to net operating income in operating activities under direct method...

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