Explanation:

• Option A (Gain on sale of assets): Incorrect because a gain on the sale of assets is a non-operating item included in the net income calculation. Under the indirect method, such gains must be subtracted from net income to reconcile to operating cash flows.

• Option B (Amortization of bond discount): Correct because amortization of a bond discount is a non-cash expense. Non-cash expenses are added back to net income in the operating activities section of the cash flow statement to adjust for items that do not affect cash flow.

• Option C (Decrease in deferred tax liability): Incorrect because a decrease in deferred tax liability indicates that accounting tax expense is lower than cash taxes paid. This decrease must be subtracted from net income to reconcile to operating cash flows.

CFA Exam Relevance: This question tests the candidate's understanding of adjustments required when converting net income to operating cash flows under the indirect method, a key concept in financial statement analysis.