Does Payment for Inventory Received Appear on a Statement of Cash Flow?

The cash-flow statement is one of the business world's basic financial statements. The income statement counts income from credit sales and such that haven't been paid for yet. The cash statement is strictly about the money that flows into and out of your business in a given period. When you buy inventory, sooner or later the cost appears on the cash-flow statement.

Buying inventory on credit, like selling on credit, doesn't have any effect on your cash flow. When you pay the bill for the purchase, you report it as a cash outflow, reducing your cash on hand. Getting paid for sales later puts cash back into the company. Tracking cash flow matters because you need cash to pay taxes and employees. If you have steady income but it's mostly credit sales, paying for inventory may leave you dangerously short of cash on hand.

Credit purchases affect the income statement rather than the statement of cash flow. The income statement includes credit deals as income or expense: if you buy $5,000 of inventory on credit, you record the $5,000 expense as soon as you take possession. When you actually pay the bill, that doesn't affect your income. Even though you're sacrificing cash, the income statement has already recorded the effect of the purchase on your income.

Monitoring both your cash flow and your income gives you a much more realistic picture of your finances than one alone. Your cash-flow statement can alert you to a shortage of money, but if you do any credit business, it's not going to give you a full picture. If, for example, your company is currently flush with cash but you've bought thousands of dollars of inventory on credit, you may face problems down the road if the inventory doesn't sell.

The statement of cash flow covers three different kinds of flow. Purchasing inventory for later sale is part of operations. If you're putting more money into your business, that counts as investment cash flow. Financing -- taking out a loan or paying one back -- makes up the third element. If you're just starting your company, the investment sector may be the largest one. After you've been open for a while, operations may become more important.