Hello Everyone,
As per my understanding : “If Inventory is increasing then current asset is increasing and CFI is decreasing and if sale is increasing then inventory is decresing and CFO is increasing”.
Please correct me in case above statement does not make sense and also help me to undestandand the dependancy/linkage/relation of sale and inventory.
Thanks
An change in inventory/current assets does not result in an change in CFI. CFI is only capital/long-term assets.
Inventory is, by definition, a current asset. Therefore, if inventory increases, current assets increase.
Sales decrease inventory. This should be fairly obvious. If you are a shirt seller and you sell 100 shirts, then your inventory decreases by 100 shirts. So as sales increase, inventory decreases.
Since sales drive earnings, and CFO includes earnings, it would make logical sense that if sales increase, CFO would increase. (Note that this is not necessarily true if the cost of sales is greater than sales, but I doubt that phenomenon would exist in the real world, and it certainly couldn’t exist for long.)
Sales and inventory have nothing to do with investing activities and have no bearing on CFI.
What if I pay cash for my inventory? 
Mind = blown
If sales are a cash inflow, and the decrease of inventory is a cash inflow. Then if I have 100 shirts that cost $0.5 and sell 20 for $1, then I should have a FCF = EBIT - change in WC = ($20 - $10) + $10 = $20 ?
^Depends on how you look at it. If you’re only looking at that one sale, then yes.
But you forgot to take into account of how you got the inventory in the first place. Just like Geo said, you had to pay cash for the shirts in the first place.
So if you pay $10 for the shirts, then sell the shirts for $20, then your FCF is only $10 on a full “round trip” to first buy the inventory, then sell it.
Using that logic. If FCF = EBIT(1-t) + NCE - FCIvc - WCInv.
Then FCF for Y0 is = -$10 (+Inventory)
FCF for Y1 = 20-10+10 = $20
So the undiscounted FCF is 20-10 = $10. Makes sense, didn’t actually understand it until wriing it down.
I am not able to understand your calculation.
Howdy.
I suspect that when you typed “CF I” you’d intended to type “CF_ O _”; inventory has nothing to do with investing, but everything to do with operations.
When inventory increases, you’re buying inventory. Eventually, you’ll pay for that inventory; that’s a cash outlow from operations, so CFO decreases.
When you sell stuff, inventory decreases. Eventually, you’ll get paid for the stuff you sell; that’s a cash inflow from operations, so CFO increases.
You’re welcome.