Question

A company has increasing accounts receivable, increasing inventory and decreasing accounts payables year over year on the balance sheet.  Which of the following is correct about the impact operating cash flow?

	a.	None of these
	b.	Increase in inventory is a source of cash
	c.	Increase in accounts receivable is a source of cash
	d.	Decreasing accounts payable is a source of cash

Answer 1

Under indirect method of preparation of statement of cash flows, changes in current assets and current liabilities are shown under operating activities

A decrease in current assets ( for example accounts receivable) means there is a cash inflow as cash has been collected due to reduction of current asset ( for example cash collected from accounts receivable). On the other hand, an increase in current assets means a cash outflow

Similarly, a decrease in current liability ( for example accounts payable) means there is a cash outflow as cash has been paid due to reduction of current liability ( for example cash paid to accounts payable). On the other hand, an increase in current liabilities means a cash inflow

So, as per above discussion, following results are derived :

An increase in inventory means a cash outflow which is termed as use of cash and not source of cash and so option b is not correct

An increase in accounts receivable means a cash outflow which is termed as use of cash and not source of cash and so option c is not correct

A decrease in accounts payable means a cash outflow which is termed as use of cash and not source of cash and so option d is also not correct

So, as per above discussion, none of the options from b, c and d are correct and so option a is the correct option