Final answer:
Inventory is classified differently from property, plant, and equipment (PP&E) on the statement of cash flows because it is a current asset that is more liquid and subject to value changes, while PP&E is a long-term asset with more stable value and is not directly related to core operations.
Step-by-step explanation:
Inventory and property, plant, and equipment (PP&E) differ in their cash effects on the statement of cash flows due to their inherent characteristics and roles in a business. As current assets, inventories are intended for sale within the normal business cycle and are more liquid, thus being easily converted into cash. In contrast, PP&E are long-term assets that are used in the production of goods or services and are not readily converted into cash.
The value of inventory is subject to frequent changes and can be more volatile, reflecting the immediate operational activities and market demands. On the other hand, PP&E have a more stable value and depreciate over time. These differences influence how transactions involving these assets are recorded on the statement of cash flows. Specifically, changes in inventory are reflected in the cash flow from operating activities, while the acquisition and sale of PP&E are listed under investing activities.
Ultimately, the classification of cash flows for inventory and PP&E relates to their differing liquidity and the timeframe within which they are expected to benefit a business, thereby affecting the company's cash flow management.