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

When inventory increases by $10 and is purchased with cash, the immediate effect on the Income Statement is that there is no impact. This is because the purchase of inventory does not directly affect revenue or expenses; instead, it affects the balance sheet. Specifically, cash decreases by $10, while inventory increases by $10, keeping the overall assets unchanged.

Inventory is considered a current asset on the balance sheet, and its purchase does not create an expense until the inventory is sold. Only when the goods are sold does the cost of the inventory move to the Income Statement as a cost of goods sold (COGS), which would then affect net income. Therefore, at the stage of purchase, there is no immediate effect reflected on the Income Statement.

This distinction clarifies why options indicating a change in net income or operating expenses don’t apply in this scenario—purchases of inventory do not affect those categories until subsequent transactions occur.