I’m looking at two problems, one in the Kaplan guide and one in the CFAI guide.
In the Kaplan guide, we are asked to solve a statement of cash flows problem. In it, a decrease in inventories is added to find cash flow from operations. In the CFAI guide problem, asking us to find cash paid to suppliers and cash recieved from customers, an increase in inventory is added to find cash paid to suppliers. My questions are: a.) why is a decrease in inventory added in one probllem and an increase in inventory is added in another?
b.) It seems that sometimes inventory is counted as an asset and other times, a liability. When is this the case?
c.) are there other items that behave like this? Thanks
When assets decrease, it is assumed that they are being disposed off for cash, thus the addition to cash flow, under the indirect method. It is assumed that when assets increase, you are parting away with cash to buy those assets, inventory increase means you’re buying more inventory, paying cash to suppliers. Many treatment items in the Statement of Cash Flow are intuitive, if you really think about their nature, you should know why they are treated how they are.