If I had a decrease in Inventory of 2000, and I had to show what the...

If I had a decrease in Inventory of 2000, and I had to show what the effect is on cash flow? Cash Flow would be a +2000, but why is that? If there is a increase in inventory by 2000, It would be -2000, because you had to purchase that inventory to have the increase in inventory, so that's why it's -2000. If that's the reason. However why would a decrease in inventory of 2000, be 2000 in cash flow statement?

Expert Solution

Cash flow statement:-

Cash flow statement (CFS) prepared to know about the position and flow of cash. All the adjustments made in the statement done according to flow of cash. There are different methods of preparation of CFS but principle is same i.e. flow of cash.

Inventory has direct relation with cash if inventory decreases it mean Company has sold inventory more than purchased. It denotes that cash has been realized (inflow) more than spent out (outflow) in inventory and vice-versa. Sometimes inventory sold on credit, in such case cash not flow in company but receivable/debtors increases which compensate the position of cash. Inventory and current receivables are part of current assets, decrease in inventory and increase in receivables mitigate the balance.

However if inventory reduces due to exceptional conditions like abnormal wastage, loss due to accidents / fire, impact of the same will be adjusted separately.

jeff jeffy answered 1 year ago

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