If Inventory increases by $10 and is paid for in cash, what is the immediate effect on the Income Statement?

• A. Net Income increases
• B. Operating Expenses increase
• C. No changes
• D. Revenue decreases

Answer: (C)

When inventory increases by $10 and is paid for in cash, the immediate effect on the Income Statement is that there are no changes. This situation involves a balance sheet transaction where cash, an asset, decreases, and inventory, another asset, increases by the same amount.

Since the transaction only affects the balance sheet (assets) and does not involve revenues or expenses, the Income Statement remains unchanged. This reflects the fundamental principle that inventory, as an asset, does not have an immediate impact on income or expenses until the inventory is sold and potentially recognized as Cost of Goods Sold (COGS). Therefore, while there is a change in the composition of assets, there is no accounting effect on net income or operating expenses at this point.