What happens to cash flow when stock-based compensation increases?

Stock-based compensation is typically classified as a non-cash expense on a company's income statement. When a company grants stock options or shares to its employees, it recognizes this expense without an immediate outflow of cash. This means that while the expense reduces net income for accounting purposes, it does not impact cash flow directly at the time of the grant.

In the context of cash flow, this non-cash expense needs to be added back when calculating cash flow from operations. Therefore, when stock-based compensation increases, it is adjusted in the cash flow statement to reflect that it does not actually consume cash. This adjustment leads to an increase in cash flow reported from operating activities.

Thus, the correct answer indicates that cash flow experiences an increase due to this adjustment for non-cash expenses, demonstrating how accounting rules differentiate between actual cash movements and accounting entries.