When does accounts payable increase?

When does accounts payable increase?

• A. When the company sells inventory
• B. When the company buys inventory on credit
• C. When the company collects receivables
• D. When the company pays off debt

Answer: (B)

Accounts payable increases when a company buys inventory on credit because this transaction creates an obligation to pay the supplier in the future. When inventory is purchased, the company does not immediately use cash; instead, it incurs a liability, reflecting the amount owed to the supplier until payment is made. This scenario is a common situation where a business expands its operational capacity without immediately affecting its cash flow. In contrast, selling inventory results in revenue recognition, which influences accounts receivable rather than accounts payable. Collecting receivables decreases accounts receivable rather than affecting accounts payable. Paying off debt reduces a liability, which also does not relate to the increase in accounts payable. Thus, purchasing inventory on credit is the only scenario that directly correlates with an increase in accounts payable.

Accounts payable increases when a company buys inventory on credit because this transaction creates an obligation to pay the supplier in the future. When inventory is purchased, the company does not immediately use cash; instead, it incurs a liability, reflecting the amount owed to the supplier until payment is made. This scenario is a common situation where a business expands its operational capacity without immediately affecting its cash flow.

In contrast, selling inventory results in revenue recognition, which influences accounts receivable rather than accounts payable. Collecting receivables decreases accounts receivable rather than affecting accounts payable. Paying off debt reduces a liability, which also does not relate to the increase in accounts payable. Thus, purchasing inventory on credit is the only scenario that directly correlates with an increase in accounts payable.