Question

Adjustments to Net Income—Indirect Method Omni Corporation's accumulated depreciation—equipment account increased by $7,700, while $5,000 of patent amortization was recognized between balance sheet dates. There were no purchases or sales of depreciable or intangible assets during the year. In addition, the income statement showed a gain of $5,800 from the sale of investments. Reconcile a net income of $87,100 to net cash flow from operating activities. $

Answer 1

Solution

Omni Corporation

Reconciliation net income to net cash flow from operating activities:

Cash flow statement (partial) Indirect Method
Net Income		$87,100
Adjustments to reconcile net income to net cash flow from operating activities:
Depreciation	$7,700
Patent amortization	$5,000
Gain from sale of investments	($5,800)	$6,900
Net cash flow from operations		$94,000

Note: Reconciliation of net income to net cash flow from operating activities essentially involves adding or deducting non-cash events that reflect in the income statement to derive the actual cash flow from operations.

Depreciation expense reflects the increase in accumulated depreciation during the current year. Depreciation is a non-cash event and hence the same is added back to net income.

Likewise, amortization is also an approximation of the patent cost over its useful life. Hence, amortization is added back to net income.

Gain from sale of investments results due to the difference between the sale value and the cost of purchase of investments and not an actual revenue. Hence, the same is deducted from net income.