What should be added back to net income in the cash flow statement due to its non-cash nature?

In the cash flow statement, both amortization and depreciation are added back to net income because they are non-cash expenses. This means that while these expenses reduce net income on the income statement, they do not require an outflow of cash during the period.

Amortization refers to the gradual write-off of intangible assets, such as patents or goodwill, over their useful life. When calculating cash flows, the actual cash outlay for these assets occurred at the time of purchase, so the amortization expense does not affect cash flow in the current period.

Depreciation, on the other hand, deals with tangible assets, such as machinery or buildings, and similarly allocates the cost of these assets over their useful life. Like amortization, depreciation reduces net income without an associated cash expense in the period it's recorded.

Therefore, including both amortization and depreciation back into net income when deriving cash flow provides a clearer picture of the actual cash generated by a company's operations. This practice helps analysts and investors understand the cash-generating capabilities of a business without the distortion caused by non-cash accounting entries.