Question

If a company is using the indirect method to prepare the statement of cash flows, a decrease in the inventory account should be reported as:

Answer 1

If a company is using the indirect method to prepare the statement of cash flows, a decrease in the inventory account should be reported as a decrease in cash flows from operating activities.

An indirect method to prepare the statement of cash flows

• The statement of cash flows is prepared indirectly by adjusting net income for changes in balance sheet accounts in order to determine the amount of cash generated by operational activities.
• One of the parts of a firm's set of financial statements, the statement of cash flows, is used to show where a company gets its money from and what it does with it.
• It provides details on the cash generated by operations and the impact of various balance sheet modifications on a company's cash position.
• The indirect mode of presenting is particularly common since the data needed for it can be gathered rather quickly from the accounts that a company typically has in its chart of accounts.

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