How is amortization expense treated on the cash flow statement?
Amortization is added back from net income on the cash flow statement. The point of the cash flow statement is to show you how much cash a company actually generated, not just the “expenses” of the company. Amortization is the process of slowly reducing the value of certain financial or intangible assets. For example if I were a drug manufacturer who spent $6 million to purchase a drug patent which the FDA allows me to have for 3 years, then over each of the 3 years I would “amortize” $2 million because after 3 years this $6 million patent would be “used up”. This would allow me to spread out the cost of this drug over 3 years and expense it to save on my taxes. However I wouldn’t actually be paying $2 million per year. That $2 million is just a magic accounting number that isn’t real (I actually already paid the $6 million when I bought the patent). So the $2 million needs to be added back on the cash flow statement each year in order to tells us how much we actually earned in cash fl
