The cash flow statement reports all sources and uses of cash in a company. Two preparation methods exist, known as the direct and indirect methods. Each method includes three sections: operating, investing and financing activities. Patents fall under the second section, investing activities. Accountants record the sale or purchase of long-term assets in this section. Since a patent lasts more than 12 months, it is a long-term asset in accounting terms, thus the inclusion in investing activities.
Determine the cost of the patent. Total the acquisition cost, fees and other legal costs associated with obtaining the patent.
Record the patent purchase into the general ledger. Debit the patent asset account and credit cash.
Report the patent purchase on the statement of cash flows by listing an outflow for the total price paid for the patent. The general ledger information is sufficient for reporting this purchase.
Amortization that relates to patents falls under the operating section. Monthly amortization expense relates to a company’s normal operating activities, hence the inclusion in operating activities.