Which adjustment to net income yields after-tax net operating income?

• A. Add back depreciation and amortization
• B. Subtract depreciation and amortization
• C. Subtract interest expense
• D. Add back depreciation and amortization

Answer: (D)

The main idea is to reflect the cash-generating power of core operations after taxes, without financing effects or non-cash charges distorting the view. Depreciation and amortization are non-cash deductions that lower net income but do not reduce actual cash flow. To convert net income into a figure that represents operating performance after tax, you add back these non-cash charges. Subtracting them would further inflate the negative impact on the income statement and doesn’t align with recovering cash-based operating performance. Interest expense, on the other hand, is tied to financing, not operations, so adjusting for it would move away from the operating focus. Therefore, the appropriate adjustment is to add back depreciation and amortization.