Question

Manufacturers and merchandisers can apply just-in-time (JIT) to their inventory management. Apple wants to know the impact of a JIT inventory system on operating cash flows. Review Apple’s statement of cash flows in Appendix A to answer the following.

Required

1. Identify the impact on operating cash flows (increase or decrease) for changes in inventory levels (increase or decrease) for each of the three most recent years.

2. What impact would a JIT inventory system have on Apple’s operating income? Link the answer to your response for part 1.

3. Would the move to a JIT system have a one-time or recurring impact on operating cash flow?

Short answer

1. When the inventory level increases, the operating cash flow decreases, and the operating cash flow will increase when the level of inventory decreases.
2. Moving to just-in-time inventory willimprove the operating income of Apple.
3. When the business entity moves to Just-in-time inventory, it will have a recurring impact on the operating cash flow.

Step-by-step solution

Definition of Operating Cash Flow

Operating cash flow can be defined as the metric that provides information about the inflow generated by the business entity from the primary business operations. It is reported in the first part of the statement of cash flow.

Impact of changes in inventory levels on the operating cash flows

Reporting of increase and decrease in the level of inventory:

Particular	Amount $
Net income	XXX
Add: Decrease in inventory	XXX
Less: Increase in inventory	(XXX)

When the inventory level decreases, then it means that the business entity has sold inventory; therefore, it is reported as an addition to the net income.

When the inventory level increases, then it means that the business entity has acquired inventory; therefore, it is reported as a deduction from the net income.

Impact of the JIT inventory system on Apple’s operating income

If the Apple Company moves to just-in-time inventory, the business entity will acquire the inventory when needed instead of handling large amounts of inventory. When the business entity does not handle a large amount of inventory, it will reduce the cost of handling and maintaining the inventory and subsequently increase the operating income.

Impact of moving to JIT on operating cash flow is one-time or recurring

When the business entity moves to Just-in-time inventory, it will have a recurring effect on the operating cash flow of the business entity because the entity will continuously maintain a lower inventory level that will improve the operating cash flow and efficiency of the business entity.