Question

All else constant, an increase in inventory will have what effect on operating cash flow?

Answer 1

An increase in inventory would decrease the cash flow.

An increase in current asset implies a blockage of funds, like in this instance, a blockage of funds in the company's inventory, which implies cash outflow and lowers the cash flow from operating activities using the indirect approach.

What is Operating cash flow?

• An essential metric for assessing the financial performance of a company's main business operations is operating cash flow.
• A cash flow statement's opening part, which also contains cash from investing and financing activities, shows operating cash flow.
• The indirect method and the direct approach are both ways to show operating cash flow on a cash flow statement.
• The indirect technique starts with the income statement's net income and then subtracts non-cash items to get the cash base amount.
• The focus of operating cash flows is on cash inflows and outflows associated with a company's core business operations, including the sale and purchase of inventories, the provision of services, and the payment of salaries.

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