An increase in inventory indicates that a company has purchased more goods than it has sold. Increasing inventory requires a cash outflow. Cash outflows have a negative effect on the company’s cash balance.

Negative amounts on the statement of cash flows can be interpreted to mean 1) a cash outflow, 2) that cash was used, or 3) that it was unfavorable for the company’s cash balance. In other words, you can think of negative amounts as having a negative effect on the company’s cash balance.

Hence, the amount of the increase in inventory is shown as a negative amount on the statement of cash flows. Had inventory decreased, the amount of the decrease in inventory would be shown as a positive amount on the statement of cash flows.

Learn more about the Statement of Cash Flows.

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