Which items are typically adjustments to net income to compute cash provided by operating activities?

• A. Depreciation, amortization, changes in inventories, receivables, and payables
• B. Issuing new equity
• C. Paying dividends
• D. Purchases of long-term assets

Answer: (A)

Starting point is converting net income to cash from operating activities by removing accrual effects. Depreciation and amortization are noncash expenses that reduced net income but did not use cash in the period, so they are added back in the operating cash flow calculation. Changes in inventories, receivables, and payables capture the timing differences between when revenue is earned and cash is received, and when expenses are recorded versus paid. An increase in inventories ties up cash; an increase in receivables means cash hasn’t yet come in from sales; and an increase in payables means you’ve delayed cash outflows. These adjustments reflect the real cash effects of operating activities.

The other items—issuing new equity, paying dividends, and purchases of long-term assets—are not operating activities; they belong to financing and investing activities, so they don’t adjust net income to compute cash provided by operating activities.