Final answer:
An increase in inventory will initially decrease gross profit as the cost of unsold goods is not included in the cost of goods sold; however, this doesn't immediately affect net income. Net income reflects revenue and expenses for sold goods and services.
Step-by-step explanation:
When inventory increases by 10, this impacts the income statement by likely causing a decrease in gross profit. An increase in inventory signifies that more goods are on hand, which means the cost of goods sold (COGS) will not reflect these additional inventory costs until they are sold. As a result, the expenses reported on the income statement during the period in question are lower, inflating the gross profit temporarily. However, over time, as the inventory is sold, the COGS will increase accordingly, balancing out this effect.
An increase in inventory does not directly affect net income unless the sold goods' cost is accounted for on the income statement. If inventory goes up without a corresponding increase in sales, there is no immediate impact on net income. Net income is affected by overall revenue and all expenses during a period, including COGS, operating expenses, taxes, and other costs.