ECONOMICS

Detailed explanation-1: -Inventory generates cashflow but purchasing inventory requires a cash outlay that affects the company’s cash balance. An increase in inventory stock will appear as a negative amount in the cashflow statement, indicating a cash outlay, or that a business has purchased more goods than it has sold.

Detailed explanation-2: -Inventory levels have a direct effect on the cash flow. A company with a limited cash flow will severely damage its expenditures if it ties up much needed funds in inventory that is not required. An increase in inventory requires an increase in space and labor.

Detailed explanation-3: -An increase in a company’s inventory indicates that the company has purchased more goods than it has sold. Since the purchase of additional inventory requires the use of cash, it means there was an additional outflow of cash.

Detailed explanation-4: -Inventory usually recorded as a current asset on the balance sheet, and an increase in inventory is offset by a corresponding negative cash adjustment (to operating cash payments) on the cash flow statement – i.e. an adjustment is made to cash to reflect net inventory purchases during the period.