What is an inflow of cash in the context of changes in assets?

Prepare for the Peregrine Foundations of Business Finance Test with detailed explanations and multiple choice questions. Get ready to excel in your exam!

In the context of changes in assets, an inflow of cash refers to a situation where cash is entering the company, resulting from operations or transactions involving assets.

A decrease in an asset, such as inventory, is considered an inflow of cash because it often signifies that inventory has been sold, leading to cash being received. When a company sells its inventory, it receives payment from customers, which results in an increase in cash flow, signifying that cash is coming into the business.

This is different from increasing inventory, which would tie up cash and reduce cash flow, as well as payments from customers and sales of fixed assets, both of which reflect cash transactions but do not directly pertain to the context of changes in the asset base itself. Rather, those examples involve the direct conversion of existing assets or liabilities into cash. Hence, a decrease in inventory is clearly indicative of a cash inflow because it directly correlates to revenue generation from sales activities.

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