Analyzing Business Earnings 57certain items of revenue, gain, expense, and loss. For example, depreciation
and amortization are added back to Escalon’s net income or loss (Exhibit 2.14)
because they are not cash expenses.^20 The two asset write-downs are likewise
added back to net income or loss because of their noncash character. However,
a separate judgment may also be made that, unlike depreciation, these two
items are bothnoncash and nonrecurring.
Also notice that two different gains on sales of product lines are deducted
in arriving at operating cash f low. It would be tempting to assume that these
are noncash gains. However, the investing activities section of the Escalon
statement of cash f lows, a portion of which is included in Exhibit 2.16, reveals
this not to be the case. Cash inf lows of $2,059,835 and $2,117,180 from the
sales of Betadine and Silicone Oil, respectively, are disclosed in cash f lows
from investing activities. The gains are fully backed by cash inf lows, but they
are deducted from net income because they are not considered a source of op-
erating cash f low. Whatever the specific basis for deducting these gains from
net income to arrive at cash f low from operating activities, the process of de-
duction simultaneously discloses these nonrecurring items.
Two other items in Escalon’s operating activities section (Exhibit 2.14)
require comment. First, the addition to the 2000 net loss of $33,382 for “equity
in net loss of joint venture” is required because of the noncash nature of this
loss. GAAPs require that a firm (the investor) with an ownership position that
permits it to exercise significant inf luence over another company (the investee)
short of control must recognize its share of the investee’s results. This princi-
ple caused Escalon to recognize its share of its investee’s loss in 2000. How-
ever, there is no cash outf low on Escalon’s part associated with simply
recognizing this loss in its income statement.^21 Therefore, the addition of the
loss to net income simply ref lects its noncash character. Determining whether
the loss is nonrecurring would require an examination of the income statement
of the underlying investee company.
The second item is the $75,000 of “income from license of intellectual
laser property.” This item is deducted from 1998 net income in arriving at
EXHIBIT 2.16 Investing cash f lows: Escalon Medical Corporation,
partial investing cash f lows section, years ended
June 30.
1998 1999 2000
Cash Flows from Investing Activities:
Purchase of investments $(470,180) $ (259,000) $(7,043,061)
Proceeds from maturities of investments 375,164 589,016 7,043,061
Net change in cash and cash
equivalents—restricted — (1,000,000) 1,000,000
Proceeds from the sale of Betadine product line — 2,059,835 —
Proceeds from sales of Silicone Oil product line — — 2,117,180
SOURCE: Escalon Medical Corporation, annual report, June 2000, F-6.