Cash Flow |
What happens during business operations is that, the business spends cash to acquire inventory and it sells the inventory to acquire cash. Now on the income statement, both cash and inventory are shown as current assets, thus by implication, an increase in inventory is associated with a decrease in cash flow into the business. Thus, Net Working capital is hardly affected (No liabilities are playing a part as long as cash is used). It must however be understood that the value of a business' assets is always seen as the sum of its liabilities and the value of its equities. In other words cash flow from operating activities must equal the cash flow to its creditors and its investors. Other things to understand when dealing with cash flow are:
We will cover these concepts in the next few postings. For now, just know that they are important to understanding business cash flow. |
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