How would a purchase $400 of inventory on credit affect the income statement? A. It would increase liabilities by $400. B. It would decrease liabilities by $400. C. It would increase noncash assets by $400. D. Both A and C E. None of the above
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Answer: The correct answer would be D. Both A and C. When a company purchases $400 of inventory on credit, this event affects the balance sheet but not directly the income statement at the time of the transaction. On the balance sheet, the company’s noncash assets (specifically inventory) would increase by $400 because the company has more inventory at its disposal (C). At the same time, the company now owes $400 to the supplier, which creates a liability. So, the company's liabilities would also increase by $400 (A). However, these changes do not affect the income statement until the inventory is actually sold or there is an adjustment for inventory shrinkage or depreciation.