MANAGEMENT

Detailed explanation-1: -Inventory turnover improves business cashflow when items are ‘turning over’ and not sitting unsold on the shelves. High turnover implies strong sales and requires increasingly efficient inventory control to meet this high demand and respond to market needs.

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.

Detailed explanation-5: -When the current asset decreases, there is an inflow of cash. For example: when inventories are decreased it means they have sold the inventories and therefore you get money. Hence it is added in the cash flow statement.