In the indirect method for cash flow from operations, which type of item is typically added back to net income?

• A. Cash receipts from customers.
• B. Payments for equipment purchases.
• C. Non-cash expenses such as depreciation or amortization.
• D. Dividends paid.

Answer: (C)

In the indirect method, you start with net income and adjust for items that affected reported income but didn’t involve actual cash in the period. Non-cash expenses like depreciation or amortization fit this, because they reduce net income without any corresponding cash outlay. To reflect the true cash generated by operations, you add these non-cash charges back to net income.

Cash receipts from customers are real cash inflows, but their effect on cash is captured through changes in working capital (for example, accounts receivable), not by simply adding them back. Payments for equipment purchases are investing activities, and dividends paid are financing activities, so they aren’t added back in the operating activities reconciliation.