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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:

A. It would increase liabilities by $400.

Explanation:

Merchandise inventory     Debit       = $400

Accounts payable             Credit      = $400

Note: We assume that the company used a perpetual inventory system. To record the purchase of inventory on account. As inventory is a debit, it increases the asset site. The normal balance of accounts payable is credit; the liabilities site is increased.

Therefore, option A is correct.

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