Which adjustment corresponds to changes in non-cash current assets using the indirect method?

When using the indirect method for preparing the statement of cash flows, adjustments to reconcile net income to net cash provided by operating activities are necessary. One important aspect of this reconciliation involves the treatment of changes in current assets and current liabilities.

An increase in non-cash current assets, such as inventory or accounts receivable, reflects that cash has been used to acquire those assets. This implies that, while net income may be increasing due to sales activities or asset appreciation, actual cash available for operating activities is lower because cash has been tied up in these assets. Therefore, to accurately reflect cash flow from operating activities, it is essential to deduct the increases in current assets from net income.

This adjustment ensures that the statement of cash flows presents a more truthful picture of cash generated from operational sources by accounting for the cash outflows associated with growing current assets. In contrast, decreases in current assets would be added back, as they indicate cash inflows.