Final answer:
In the indirect method for the statement of cash flows, the amortization of a bond discount is added back to net income as it is a non-cash expense and does not affect cash flow.
Step-by-step explanation:
When a firm uses the indirect method to compile the operating section of its statement of cash flows, it starts with net income and makes adjustments for any non-cash items and for any changes in working capital. Among the options provided:
- (a) A decrease in accounts receivable would be added to net income, as it indicates that cash has been received from customers.
- (b) Amortization of a bond discount is a non-cash expense and would be added back to net income.
- (c) A loss on the sale of land is a non-operating item that is added back to net income since it doesn't involve cash flow from operating activities.
- (d) Amortization of premium on bonds payable is similar to amortization of a bond discount and is a non-cash expense that would be added back to net income.
Therefore, the correct answer is b. Amortization of a bond discount since it is subtracted in the income statement but does not affect actual cash flow, and thus is added back to net income in the cash flow statement.