3. Preparing a statement of Cash Flows

Question 1

How is an increase in inventory treated in preparing a statement of cash flow?

Answer 1

Increase in inventory is treated as a negative (in parentheses). This is because it represents a cash outflow; cash is being spent on inventory.

Question 2

How is an increase in receivables treated in preparing a statement of cash flow?

Answer 2

An increase in receivables would be treated as negative; more receivables means less cash has been received.

Question 3

How is an increase in payables treated in preparing a statement of cash flow?

Answer 3

An increase in payables is positive because cash is being retained and not used to pay off payables. There is therefore more cash.