Most financial statements report financial activity based on the activities of the company. For example, if the company performs a service, the company reports the revenue earned regardless of when it receives the money. Intangible assets refer to items owned by the company that possess no physical form. These include patents or copyrights. A company acquires intangible assets by transferring cash to the seller. The cash flow statement communicates the cash transactions of the company. Each cash transaction falls into one of three categories. These categories include cash flow from operating activities, cash flow from investing activities or cash flow from financing activities. The purchase of intangible assets and the transfer of cash appears in the cash flow from investing activities section of the cash flow statement.
Items you will need
- Current year balance sheet
- Prior year balance sheet
Locate the intangible asset balance from the asset section of the current year’s balance sheet. The asset section of the balance sheet includes current assets, property plant and equipment and other noncurrent assets. Intangible assets are considered other noncurrent assets. Review the other noncurrent assets section of the current year’s balance sheet and identify the intangible assets.
Locate the intangible asset balance from the asset section of the prior year's balance sheet. This appears in the other noncurrent assets section, in the same place as in the current year’s balance sheet.
Calculate the increase in the intangibles balance. Subtract the prior year’s intangible balance from the current year’s intangible balance. This determines the amount that the intangible asset balance has increased.
List the intangibles increase in the cash flow from investing section. Write the description, such as purchase of intangible asset, and the dollar amount of the increase. This amount increases the total cash flow from investing activities reported on the cash flow statement.
Companies who buy and sell intangible assets experience both increases and decreases in the intangible asset balance. Decreases in intangible assets appear the same way on the cash flow statement as increases. However, this amount reduces the total cash flow from investing activities.
If the company borrowed money to purchase the intangible asset, the increase still appears in the cash flow from investing section. The money borrowed by the company appears in the cash flow from financing section. The cash flow statement considers these as two separate transactions.