What impact does a sale of inventory have on both cash and inventory in the balance sheet?

What impact does a sale of inventory have on both cash and inventory in the balance sheet?

• A. Cash increases and inventory decreases
• B. Cash decreases and inventory increases
• C. Both cash and inventory increase
• D. No impact

Answer: (A)

When inventory is sold, it results in an increase in cash because the sale typically generates revenue, which is received in cash or recorded as an accounts receivable if not paid immediately. This increase in cash reflects the cash inflow from the transaction. Simultaneously, the inventory account decreases because the sold items are no longer part of the company's assets. This reflects a reduction in the total inventory available, as these goods have been transferred to the customer. Therefore, the transaction affects the balance sheet by increasing cash while decreasing inventory, leading to a shift in the asset composition but not affecting the overall total assets. This relationship shows a direct impact of the sale on both accounts, reaffirming the accurate answer.

When inventory is sold, it results in an increase in cash because the sale typically generates revenue, which is received in cash or recorded as an accounts receivable if not paid immediately. This increase in cash reflects the cash inflow from the transaction.

Simultaneously, the inventory account decreases because the sold items are no longer part of the company's assets. This reflects a reduction in the total inventory available, as these goods have been transferred to the customer.

Therefore, the transaction affects the balance sheet by increasing cash while decreasing inventory, leading to a shift in the asset composition but not affecting the overall total assets. This relationship shows a direct impact of the sale on both accounts, reaffirming the accurate answer.