Final answer:
The statement is incorrect; the inventory cost flow method, such as FIFO, LIFO, or Average Cost, affects the timing of expense recognition, net income, and tax liability, thereby indirectly impacting cash flow from operating activities.
Step-by-step explanation:
The statement that the cash flow associated with buying and selling inventory is not affected by the inventory cost flow method is incorrect. The inventory cost flow method, which can be FIFO (First-In, First-Out), LIFO (Last-In, First-Out), or Average Cost, dictates how the cost of goods sold (COGS) and ending inventory values are calculated. While the actual cash paid for inventory purchases is the same regardless of the cost flow assumption used, the timing of expense recognition on the income statement is affected, which in turn can affect the reported net income and tax liability.
Because net income can influence dividend distribution and retained earnings, it indirectly affects the company's cash flow. Additionally, changes in tax payments due to different cost flow methods will directly impact cash flow. Therefore, the inventory cost flow method does affect the cash flow statement, especially under the indirect method where net income is adjusted for changes in balance sheet accounts, including inventory.