Not able to understand why amortization expense is NOT added back to CFO. Depreciation is added back to CFO, then why isn’t amortization added back to CFO. I particular I am looking at example 4 in Reading 18 in level II. Any insight would be of great help.
I beleive this is because the amortization is related to previously capitalized expenses, not the 6k incurred that period (see the footnote in the disclosures). Super tricky…
I don’t know the specifics of this question (I’d defer to ro424 on this), but in general amortization is added back to net income to get to CFO via the indirect method.
Vsenthil,
The problem asks to calculate ratios and the impact if the company expenses development costs rather than capitalize them.
The $2000 are amortization of capitalized expenses. If you adjust the numbers (exclude $6000 from Net Income and CFO for 2009), amortisation of capitalized expenses must be zero, because they were already expensed. So, in this scenario, they don´t exist anymore. Depreciation is not affected by this adjustment, so it still exists.
Is it clear? Just think, you are drawing a new scenario where all costs are expensed. So, there is no capitalized cost to be amortized. Got it? Unfortunately, the answer ro424 gave is not correct.
Carpinelli
Ah, good catch. But I think we both may have answered the wrong question! OP was asking why amortization isn’t added back to CFO, but as the magician pointed out, amortization is added to NI to get back to CFO , it’s not added to CFO.