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Question:
How does Inventory increasing by $10 affect the three financial statements?
Answer:
We'll assume that the Inventory was purchased with Cash.
Income Statement: No changes to the Income Statement.
Cash Flow Statement: Because inventory is an asset, we know that it decreases Cash Flow from Operations by $10. Net change in Cash at the bottom of the CFS also decreases by $10.
Balance Sheet: On the Assets side, Inventory increases by $10 but Cash decreases by $10, so they cancel each other out. No change to Liabilities and Shareholder's Equity and the Balance Sheet balances.
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