Question

A decrease in the inventory account during the year should be reported on the indirect method statement of cash flows as:

Answer 1

Answer:

a.An increase in cash flows from operating activities

Explanation:

The cash flow statement categories the company's transactions in a financial period into 3 groups; these are operating, investing and financing.

The net profit/loss, depreciation, changes in current assets such as inventory, accounts receivables etc, (other than cash) and liabilities are considered as operating activities including income taxes.  

The sale of assets, interest received, purchase of investments are examples of investing activities while the issuance of stocks, debt principal deduction (loan settlement), issuance of debt securities etc are examples of financing activities.

An increase in assets other than cash is an outflow while an increase in liabilities is an inflow. A decrease in assets (other than cash) is an inflow of cash while a decrease in liabilities is an outflow of cash.

Answer 2

Answer:

a.An increase in cash flows from operating activities.

Explanation:

When calculating Cash Flow from Operating Activities an Increase in Current Assets is deducted and Decrease in Current Assets is Added in the Net Income to arrive at Cash Flow from Operating Activities in the Indirect Method  of Cash Flow Statement.