Which item is NOT an adjustment to net income when calculating cash flow from operations using the indirect method?

• A. Depreciation and amortization
• B. Changes in working capital
• C. Capital expenditures
• D. Stock-based compensation expense

Answer: (C)

In the indirect method, you start with net income and adjust for items that affect net income but not cash, plus changes in working capital, to arrive at cash flow from operations. Depreciation and amortization are non-cash expenses you add back because they reduce net income without using cash. Stock-based compensation is also a non-cash expense that you add back for the same reason. Changes in working capital (like accounts receivable, inventories, accounts payable) are adjustments to reflect timing differences between when income is recognized and when cash actually moves.

Capital expenditures, on the other hand, are cash outlays for long-term assets and belong to investing activities, not to operating activities. Therefore, they are not an adjustment to net income in the indirect method.