CFA Level I · CFA Level I Exam · Analyzing Statements of Cash Flows I
In a reconciliation of net income to operating cash flow under the indirect method, which adjustment is most likely to be a subtraction from net income?
An increase in inventory is subtracted from net income. It represents cash used to buy stock that is not reflected as an expense in the period. Depreciation is added back as non-cash, and a payables increase is added because cash was not yet paid.
- ADepreciation expense of 40
- BAn increase in inventory of 25Correct
- CAn increase in accounts payable of 15
Explanation
An inventory increase means cash was spent on stock beyond the cost of goods sold already deducted, so it is subtracted. Depreciation is a non-cash expense added back. A payables increase means cash was retained, so it is added.
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