An increase in inventory balance would be reported in a statement of cash flows using the indirect method (reconciliation method) as a(n)
A) addition to net income in arriving at net cash flow from operating activities.
B) deduction from net income in arriving at net cash flow from operating activities.
C) cash outflow from investing activities.
D) cash outflow from financing activities.

Question

Quizplus · Accepted Answer

An increase in inventory balance means that the company has purchased more inventory, which will be recorded as an expense in the income statement, reducing net income. However, the increase in inventory is not a cash outflow but a use of funds, and therefore needs to be deducted from net income in arriving at net cash flow from operating activities in the statement of cash flows using the indirect method (reconciliation method).

An Increase in Inventory Balance Would Be Reported in a Statement