According to the statements of cash flows for 1994 and 1995, the increase in inventory of Mr. Clarkson’s company raised from 95 to 155 thousands of dollars. This significant increase by about 163.2% in one year actually led to changes in other indicators and larger financial needs for this firm. First, as inventory rising, COGS would be low and net income would become higher. Consequently, the company would have to pay higher taxes, which would result in a lower cash flow for the company. Second, because Mr. Clarkson purchased inventory from his vendors in large quantities, a large amount of capitals was required to fund these purchases. These capitals would increase as inventory increased. Last but not least, since working capital is defined
