What happens to assets when inventory is purchased with cash?

• A. Assets increase and cash decreases
• B. Assets decrease and cash increases
• C. Assets remain unchanged
• D. Assets increase and liabilities decrease

Answer: (A)

When inventory is purchased with cash, assets increase and cash decreases because inventory is classified as a current asset. The purchase increases the total assets of the company since inventory, a tangible asset, is added to the balance sheet. However, this increase in assets is counterbalanced by a decrease in cash, another asset. The overall effect on total assets remains the same, but there is a shift in the composition of the assets where cash decreases while inventory increases. Therefore, the first option reflects the transference of value from one asset category (cash) to another (inventory), correctly representing the impact on the financial statements.