Inventory increased by $50,000 and wages payable increased by $75,000. What will be the net result...

Inventory increased by $50,000 and wages payable increased by $75,000. What will be the net result in terms of cash flow?

Cash increased by $25,000.

Cash decreased by $25,000.

Cash decreased by $125,000.

Cash increased by $125,000.

Expert Solution

Option A, ie , cash increased by $ 25,000 ,is the right answer. Increases and decreases in current assets and liabilities are reflected in the cash flow statement. If the balance of an asset increases, cash flow from operations decreases and if the balance of a liability increases, cash flow from operations increases. Here as the inventory ie, current asset is increased by $50,000 cash flow gets decreased by $50,000. Also wages payable, ie, current liability is increased by $ 75000 means cash flow gets increased by $ 75,000. So the net result in terms of cash flow will be $75000 - $ 50,000 ,ie, cash flow increase by $ 25,000.

Option B, ie , cash decreased by $25,000, Option C, ie, cash decreased by $ 1,25,000, Option D, ie cash increased by $1,25,000 are incorrect options as the increase in inventory is considered as cash outflow and increase in wages payable is considered as cash inflow. So the net change will be increase in cash flow by $25,000.

ekkarill92 answered 2 years ago

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