Apple orders $10 of inventory using cash on hand, with no manufacturing or sale yet. Which statements describe the effects on the three financial statements?

• A. Income Statement shows a $10 expense; Cash Flow from Operations increases by $10; Balance Sheet assets unchanged
• B. Income Statement shows no changes; Cash Flow from Operations decreases by $10; Balance Sheet assets unchanged
• C. Income Statement shows a $10 expense; Cash Flow from Operations decreases by $10; Balance Sheet assets increase by $10
• D. Income Statement shows no changes; Cash Flow from Operations increases by $10; Balance Sheet assets increase by $10

Answer: (B)

Purchasing inventory with cash is a swap of one asset for another. Your cash balance decreases by 10, while your inventory balance increases by 10, so total assets on the balance sheet remain the same even though their composition changes.

There is no expense recognized yet because nothing has been sold or consumed; the cost of goods sold will appear on the income statement only when the inventory is sold.

The cash flow statement shows the cash outflow from operating activities, so cash flow from operations decreases by 10. In short: no income statement impact now, a 10 cash outflow in operating activities, and total assets unchanged (cash down 10, inventory up 10).