Reporting your inventories on statement of cash flows is virtually always done under operating activities cash flows. When you think about it, what are operating cash flows in essence? They’re meant to show the flows your business is able to generate from its operations, from its day-to-day activities. So it’s safe to say that inventories are something that fall under this category pretty clearly. 

How exactly however would you display the inventories on the statement of cash flows? In fact there are 3 lines inventories are run through (in case of indirect method for showing cash flows from operating activities) – operating profit and change in inventories. First and foremost they run through operating profit itself. Operating profit sums up from revenues, from cost of goods sold and from other operating expenses. The outflows for goods you’ve bought and already sold are shown through the result of the operating profit. For the inventories shown still on the balance sheet, with the indirect method you display the change in inventories to show whether during the reporting period you’ve paid for inventories more or less as compared to what you already showed under operating profit. It’s called an adjustment to the operating profit and it’s purpose is to show how much of the inventories that you paid for already during the prior reporting period you sold during this year and how many of the inventories you paid for are still in stock. For an instance, let’s presume that our beginning stock level was a 100 and now it’s 150. During our reporting period we sold goods worth of a 1,000. Essentially, from the total 1,000 sold we had in stock a 100 so it means we bought during the reporting period 1,050 (900 + 150).  Our cash flows should display a total of 1,050 of an outflow. From this 1,050 we show under operating profit a 1,000 as mentioned above and the rest is shown under change in inventories by deducting from the brought forward balance of a 100 the carried forward to the next period, a 150 thus reaching an outflow of 50.

To get the cash flows correct, always think how the money moved.