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Financial Accounting MCQs

Why is an increase in inventory shown as a negative amount in the statement of cash flows?

An increase in inventory indicates that a company has sold more goods than it has purchased. Increasing inventory requires a cash inflow. Cash inflows have a negative effect on the company’s cash balance.

An increase in inventory indicates that a company has purchased more goods than it has sold. Increasing inventory requires a cash outflow. Cash outflows have a negative effect on the company’s cash balance.

Answer

Correct Answer: An increase in inventory indicates that a company has purchased more goods than it has sold. Increasing inventory requires a cash outflow. Cash outflows have a negative effect on the company’s cash balance.

Explanation:

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