A company purchases $10 of inventory with cash. Which of the following describes the impact on the three financial statements?

• A. Income statement shows no change; cash flow from operations decreases by $10; balance sheet shows inventory up $10 and cash down $10.
• B. Income statement increases by $10; cash flow from operations increases; balance sheet assets increase by $10.
• C. Income statement shows a $10 expense; cash flow from investing decreases by $10; balance sheet inventory decreases.
• D. Income statement shows no change; cash flow from operations increases by $10; balance sheet cash increases.

Answer: (A)

Buying inventory with cash is an asset swap, not an expense. When you pay cash to acquire inventory, you convert one asset (cash) into another asset (inventory). There is no immediate impact on net income because you haven’t sold anything or recognized an expense yet—the cost will be recorded as expense later when the inventory is sold and COGS is recognized.

On the balance sheet, cash falls and inventory rises by the same amount, so total assets stay the same overall, and equity isn’t affected at this moment. On the cash flow statement, this uses cash in operating activities because it relates to the day-to-day working capital needs of the business, so cash flow from operations decreases by the amount spent.

So the correct description is: income statement unchanged; cash flow from operations decreases by the amount spent; balance sheet shows inventory up and cash down by that amount. The other options misstate income effects, the cash flow classification, or the direction of the asset changes.