CPIM Practice Exam

Which statement is true regarding cash flows and work-in-process inventory?

1. WIP inventory has immediate cash flow impact

2. WIP inventory increases cash flow

3. WIP inventory becomes accounts payable immediately

4. WIP inventory is not an expense until finished

The correct answer is: WIP inventory becomes accounts payable immediately

The statement that work-in-process (WIP) inventory becomes accounts payable immediately is not accurate; in fact, WIP inventory reflects a stage in the production process where raw materials and labor costs have been incurred but are not yet converted into finished goods. Therefore, it does not directly translate into accounts payable, which represent obligations to pay suppliers for materials or services received. The most accurate understanding regarding cash flows and WIP inventory is that WIP inventory does not typically have an immediate cash flow impact; instead, cash flows are affected once the inventory is sold, converting finished goods into revenue. Additionally, WIP inventory can sometimes tie up cash if production bottlenecks occur, leading to delays in converting it to finished goods and thus impacting cash flow negatively. WIP inventory is considered an asset on the balance sheet and is recognized as an expense only when the goods are completed, thus being moved to cost of goods sold once they are sold. This means that until the products are finished, they do not directly affect financial metrics related to expenses and cash flows in the same manner that finished goods might. Understanding these distinctions is key in managing inventory levels efficiently to optimize cash flow and meet production demands.