Why is an increase in inventory shown as a negative amount in the statement of cash flows?

Meaning of a Negative Amount on Statement of Cash Flows

A negative amount on the statement of cash flows (SCF) indicates that the amount described was:

  • A use of the company's cash
  • A cash outflow
  • Negative or unfavorable for the company's cash balance

Example Where Inventory Increased

An increase in a company's inventory indicates that the company has purchased more goods than it has sold. Since the purchase of additional inventory requires the use of cash, it means there was an additional outflow of cash. An outflow of cash has a negative or unfavorable effect on the company's cash balance. Negative effects are reported as negative amounts on the SCF.

To recap, an increase in inventory results in a negative amount being reported on the SCF. (A decrease in inventory would be reported as a positive amount, since reducing inventory has a positive effect on the company's cash balance.)

Additional Information

The change in the inventory is reported as an adjustment to the company's net income in the cash from operating activities section of the SCF prepared using the indirect method.

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