Which of the following is an adjustment that can be made to cash flow?

• A. Add back lease tax benefits to historical earnings.
• B. Subtract depreciation from earnings.
• C. Exclude changes in working capital from analysis.
• D. Record only cash receipts from financing activities.

Answer: (A)

When converting earnings into cash flow, you adjust for items that affect net income but don’t correspond to actual cash movement in the period. Lease tax benefits can boost reported earnings by reducing tax expense, yet they don’t always reflect a real, period cash inflow. Because of that mismatch, you add back the lease tax benefit when reconciling earnings to cash flow to avoid overstating cash-generating ability.

Subtracting depreciation would distort cash flow because depreciation is a non-cash charge you normally add back to get cash flow from operations. Excluding changes in working capital ignores real cash effects tied to day-to-day operations, and recording only cash receipts from financing activities leaves out cash outflows and other cash financing items, giving an incomplete picture.