Question

What effect will a decrease in inventory have on free cash flow?

A) It will stabilize free cash flows
B) It will have no effect on free cash flows
C) It will increase cash flows
D) It will decrease cash flows

Answer 1

A decrease in inventory will increase cash flows for a company.

Step-by-step explanation:

A decrease in inventory will increase cash flows for a company.

When a company decreases its inventory, it typically means that it has sold more products than it has purchased. This leads to a decrease in the cash tied up in inventory and an increase in the company's free cash flow.

Free cash flow is the amount of cash a company has available after deducting expenses and capital investments. By reducing inventory, a company can generate more free cash flow, which can be used for various purposes such as investing in growth opportunities or paying off debt.