What happens when inventory goes up by $10? Assuming you paid for it with cash
Answer
See the diagram below:
This question can lend itself to a common mistake of thinking that the change in Inventory would show up on the Income Statement. It’s important to remember that changes in Working Capital do not show up on the Income Statement. The $10 of Inventory purchased would only show up as an expense when goods associated with it are used.
Let’s say you bought $10 of Faceless Finance T-Shirts to sell. Try to think of where that action would fall on the Income Statement. It wouldn’t at all!
Why this matters to bankers
Similarly to the above, understanding how inventory works is key for correctly forecasting businesses that have inventory, which is pretty much every business aside from Services and SaaS businesses.