At the start of Year 3, Apple orders $10 of additional iPad inventory using cash on hand. They have not manufactured or sold anything yet. Which of the following best describes the effect on the three statements?

• A. Income statement increases revenue by 10; CFO decreases by 20; Balance sheet inventory up; cash down.
• B. Income statement unchanged; cash flow from operations decreases by 10; Balance sheet inventory up 10 and cash down 10.
• C. Income statement decreases cost of goods sold; CFO unaffected; Balance sheet assets unchanged.
• D. Income statement unchanged; CFO from operations increases by 10; Balance sheet cash up 10.

Answer: (B)

When you order inventory and pay for it with cash before any sale, you’re simply swapping one asset (cash) for another (inventory). This does not affect revenue or expenses yet, since nothing has been sold. So the income statement remains unchanged.

On the balance sheet, cash falls by the amount paid and inventory rises by the same amount, leaving total assets the same. This is a shift in asset composition, not a net change in assets.

On the cash flow statement, this is a use of cash related to working capital, so cash flow from operations decreases by the amount spent.

So the best description is: income statement unchanged; cash flow from operations decreases by 10; balance sheet shows inventory up 10 and cash down 10.