Answer: Decrease in accounts payable

## Explanation Under the indirect method of preparing the cash flow statement, we start with net income and make adjustments to convert accrual-based net income to cash flow from operating activities. **Key adjustments include:** 1. **Non-cash expenses** (like depreciation, amortization) are **added back** to net income because they reduced net income but didn't involve cash outflow. 2. **Changes in working capital accounts:** - **Decreases in current assets** (like accounts receivable, inventory) are **added** to net income - **Increases in current assets** are **subtracted** from net income - **Increases in current liabilities** (like accounts payable) are **added** to net income - **Decreases in current liabilities** are **subtracted** from net income **Analyzing each option:** - **A. Purchase of equipment** - This is a **capital expenditure** and belongs in the **investing activities** section, not operating activities. It should not be subtracted from net income in the operating section. - **B. Decrease in accounts payable** - This is correct. A decrease in accounts payable means the company paid off some of its suppliers, which represents a cash outflow. Since accounts payable is a current liability, a decrease should be **subtracted** from net income to arrive at cash flow from operating activities. - **C. Amortization expense of intangible assets** - This is a **non-cash expense** that should be **added back** to net income, not subtracted. Amortization reduces net income but doesn't involve cash outflow, so we add it back to convert accrual net income to cash basis. **Therefore, only option B (Decrease in accounts payable) should be subtracted from net income under the indirect method.**

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