In preparing the cash flows from operating activities section of the statement of cash flows by the indirect method, the net decrease in inventories from the beginning to the end of the period is added to net income for the period.

Question

Quizplus · Accepted Answer

A decrease in inventories represents a use of cash in the period, as it means that less inventory was purchased or produced, and therefore more cash was used to pay for current period expenses. Adding this decrease to net income helps to adjust for the non-cash portion of the change in inventories, and provides a more accurate reflection of the cash flows from operating activities.

In Preparing the Cash Flows from Operating Activities Section of the Statement