In the FSA book, it says that we add amortization of bond discount to the net income back when we calculate the cash flows using the indirect method. Why do we do that? And does this amortization appear in the income statement as an expense? Thank you!
because like depreciation, the amortization expense is a non-cash expense therefore the necessary adjustment for the indirect method. Yes, the amortization does show up as an income statement expense.
But this amortization is different than the amortization expense of intangible assets, is it not? Therefore, I could not understand it.
just assume you buy a pure discount bond at the beginning of the year for F/(1+r)^T, where r is the yield (YTM), T - time to expiration, F - face value. Since there are no cash flows associated with bond it doesn’t effect CFO. However, bond value gain F/(1+r)^(T-1) - F/(1+r)^T is included in the income statement. Therefore, it should be deducted just like any other non-cash gain/loss using indirect method.
Thank you very much…