An increase in inventory of $10 paid with cash has what effect on Cash Flow from Operations and Net Change in Cash?

An increase in inventory of $10 paid with cash has what effect on Cash Flow from Operations and Net Change in Cash?

• A. CFO decreases by $10; Net Change in Cash decreases by $10
• B. CFO increases by $10; Net Change in Cash increases by $10
• C. CFO decreases by $5; Net Change in Cash decreases by $5
• D. CFO unchanged; Net Change in Cash unchanged

Answer: (C)

An increase in inventory paid with cash affects cash flow from operations through working capital changes. When you buy more inventory with cash, you’re using cash to increase an asset, which reduces the cash available for day-to-day operations. In the cash flow from operations, this is recorded as a cash outflow equal to the increase in inventory, here 10. Since the net change in cash sums all cash movements, this cash outflow also reduces the overall cash balance by the same amount. So both cash flow from operations and the net change in cash decrease by 10. (If the purchase were financed by accounts payable instead of cash, the effect on CFO could be different, but the scenario explicitly uses cash.)

An increase in inventory paid with cash affects cash flow from operations through working capital changes. When you buy more inventory with cash, you’re using cash to increase an asset, which reduces the cash available for day-to-day operations. In the cash flow from operations, this is recorded as a cash outflow equal to the increase in inventory, here 10. Since the net change in cash sums all cash movements, this cash outflow also reduces the overall cash balance by the same amount. So both cash flow from operations and the net change in cash decrease by 10. (If the purchase were financed by accounts payable instead of cash, the effect on CFO could be different, but the scenario explicitly uses cash.)