I have been getting myself confused over this topic. I searched it out but the explanations to date are not as clear as I would like. When using the indirect method to determine cash flow from operations, must we add back / subtract the amortization of discount / premiums to determine the cash flow from operations? Interest expense (market rate @ issuance x carrying value) is made up of the interest payable (face value x coupon) and premium / discount amortization. For a discount bond, the amortization is a positive value (the interest expense is larger than the actual coupon payment) - therefore net income is decreased by this amount. Should we add this amount back to net income to determine CFO? Similarly, the amortization of a premium bond is a negative value (it decreases interest expense below interest paid) therefore net income is increased by this amount. Should we subtract it out of NI to determine CFO? Along the same lines - does the amortization factor in to CFF at all? Seeing as these are non-cash charges I would think that they would be completely ignored in the calculation of CFF (unlike capital leases where part of the lease payment is an actual cash outflow).
I’m going to bump this just once.