An increase in accounts receivables and an increase in inventory will need to be subtracted from operating profit in the calculation of net cash flows from operating activities.

Question

Quizplus · Accepted Answer

Both accounts receivable and inventory represent assets that are not part of current cash inflows, therefore they need to be subtracted from operating profit in order to calculate net cash flows from operating activities. An increase in accounts receivables means that less cash was collected from customers than the revenue recognized, while an increase in inventory means that more cash was spent on acquiring inventory than what was actually sold.

An Increase in Accounts Receivables and an Increase in Inventory