Question

Which of the following is one effect of a purchase of $1,000 of inventory on credit?

a, It would increase liabilities by $ 1 ,000
b. It would decrease retained earnings by $1,000
c. It would decrease liabilities by $1,000
d. It would decrease cash asset $5,000

Answer 1

A purchase of $1,000 of inventory on credit would increase a company's liabilities by $1,000 because it leads to the creation of an account payable, a future financial obligation.

Step-by-step explanation:

The answer to the question: Which of the following is one effect of a purchase of $1,000 of inventory on credit? is option a: It would increase liabilities by $1,000. When a company purchases inventory on credit, it has not yet paid cash for that inventory; instead, it has created an account payable, which is a liability. This means that the own company agrees to pay the supplier in the future, thus increasing its current liabilities.

The other options are incorrect because a purchase on inventory on credit:

• Does not directly affect retained earnings—at least not until the inventory is sold and expenses are realized against revenues.
• Would not decrease liabilities—instead, it increases them by the amount of credit provided by the supplier.
• Would not decrease cash assets, because no immediate cash payment is made in a credit transaction.