State true or false and justify your answer: An increase in inventory represents a source of funds

False. An increase in inventory shows a rise in cash flow because more money is used to purchase the extra inventory. When the amount of inventory increases, it shows that the amount of goods that a company possesses is more than the amount it has sold. Cash outflow through inventory purchase negatively impacts the cash balance because it ties up funds in the unneeded inventory during an accounting period. These funds could be used for other purposes, hence impacting a company's profitability. On the contrary, a reduction of inventory positively impacts the cash balance, since the company would be receiving more funds.