The Japanese firm Sony prepares its financial statements using U.S. GAAP. Two items related to its inventory appeared in the operating section of a recent statement of cash flows, both in millions of yen: loss on impairment of assets (38,308) and change in inventories (160,432). On the statement of cash flows both items were being added to Sony’s net loss of 98,938 in the calculation of a highly positive (407,153) net cash provided by operating activities number. Included in the loss on impairment of assets was a sizable inventory write-down.
a. Explain how net cash provided by operating activities can be such a large positive number while net income is negative.
b. Provide the basic structure of the inventory write-down entry, and explain why this amount would appear in the operating section of the statement of cash flows and be added to the net loss in the calculation of net cash provided by operating activities.
c. Did Sony’s inventory increase or decrease during the year, and how do you know?