An increase in ending inventories from one period to the next will result in a decrease in cash flows from operating activities when the indirect method is applied to compute these cash flows.

Question

Quizplus · Accepted Answer

When using the indirect method to compute cash flows from operating activities, an increase in ending inventories is considered a use of cash, as it represents an increase in the company's investment in inventory. Therefore, it is subtracted from net income to arrive at cash flows from operating activities. This results in a decrease in cash flows from operating activities, which is reflected in the cash flow statement.

An Increase in Ending Inventories from One Period to the Next