If Apple orders $10 of inventory with cash and nothing further is produced or sold yet, which statement is true?

If Apple orders $10 of inventory with cash and nothing further is produced or sold yet, which statement is true?

• A. Income Statement shows an expense of $10.
• B. Cash Flow from Operations decreases by $10.
• C. Assets increase by $20.
• D. Liabilities increase.

Answer: (B)

When you pay cash to acquire inventory, cash falls and inventory rises by the same amount, so total assets don’t change. Since nothing is sold yet, there’s no expense recognized on the income statement—the cost of goods sold only appears when the inventory is sold or consumed. On the cash flow statement, this cash outlay is an operating-activities item, so cash flow from operations decreases by 10. The decrease reflects using cash to fund day-to-day operating needs (purchasing inventory), not a new liability or a sale. So the true statement is that operating cash flow decreases by 10. The balance sheet would show cash down 10 and inventory up 10 (net assets unchanged), and there’s no change in liabilities.

When you pay cash to acquire inventory, cash falls and inventory rises by the same amount, so total assets don’t change. Since nothing is sold yet, there’s no expense recognized on the income statement—the cost of goods sold only appears when the inventory is sold or consumed.

On the cash flow statement, this cash outlay is an operating-activities item, so cash flow from operations decreases by 10. The decrease reflects using cash to fund day-to-day operating needs (purchasing inventory), not a new liability or a sale.

So the true statement is that operating cash flow decreases by 10. The balance sheet would show cash down 10 and inventory up 10 (net assets unchanged), and there’s no change in liabilities.