How does an inventory purchase of $10 using cash affect the Cash Flow Statement?

• A. Cash decreases by $10
• B. Cash increases by $10
• C. No impact on Cash Flow
• D. Cash Flow from Investing decreases

Answer: (A)

When an inventory purchase is made using cash, the Cash Flow Statement reflects this transaction as a decrease in cash. In this scenario, the company spends $10 to acquire inventory, which directly impacts cash holdings.

In the Cash Flow Statement, cash outflows are recorded under operating activities when they are related to the purchase of inventory. The cash account is reduced by the amount spent, which in this case is $10. Therefore, the overall cash position decreases by that same amount.

It's important to recognize that while the inventory purchase qualifies as an investing activity in some contexts, specifically concerning the assets acquired, the direct impact on cash flows is categorized under operating activities when simply relating to the cash expenditure. The critical element here is the immediate cash deduction resulting from the inventory purchase.