Management has authorized the purchase of a large quantity of inventory for early December. The purchase will have credit terms of 2/10, n/30, and they will authorize payment by the discount date. How will this decision affect the period's cash flows from operations-indirect method?

Question

Business

Morrison

29 March, 12:31

Management has authorized the purchase of a large quantity of inventory for early December. The purchase will have credit terms of 2/10, n/30, and they will authorize payment by the discount date. How will this decision affect the period's cash flows from operations-indirect method?

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Answers (1)

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Jasmine Camacho · Answer 1

It will decrease the cash flow

Explanation:

The purchase of inventory will make the inventory increase, therefore on the indirect method, when adjusting for the working capital, the increase on invneotry will be considered a use of cash in operating activities:

net income

adjustment on net income

adjuste net income X

change in working capital

Increase on iventory (Y)

other current increase and decreases ...

This purchase decrease the cashflow, as it is using cash to purchase an asset.