Single Step Changes on the Financial Statements Flashcards
Walk me through the 3 financial statements when a company’s operating expenses increase by $100 (assuming a 40% tax rate)
Income Statement: Operating expenses are up by $100 so Pre-Tax income is down by $100 and Net Income is down by $60 at a 40% tax rate.
Cash Flow Statement: Net Income is down by $60. There are no other changes, so cash is down by $60 at the bottom.
Balance Sheet: Cash is down by $60, so the assets side is down by $60, and retained earning on the L&E is down by $60 due to the reduced Net Income, so both sides balance.
A company’s depreciation increases by $10. What happens on the 3 financial statements?
Income statement: Pre-tax income falls by $10, and Net Income falls by $6 assuming a 40% tax rate.
Cash flow statement: Net Income is down by $6, but you add back the $10 in Depreciation since it’s non-cash, so cash flow is up by $4, and cash at the bottom is up by $4.
Balance Sheet: Cash is up by $4, but PP&E is down by $10 due to the added depreciation, so assets side is down by $6.
The L&E side is also down by $6 because Net Income fell by $6, which reduced Retained earnings, so both sides balance.
A company needs cash immediately and sells a factory that’s listed $100 on its Balance Sheet for $80. What happens on the 3 statements?
Income Statement: You record a loss of $20 on the Income Statement, which reduces Pre-Tax income by $20 and Net Income by $12 at a 40% tax rate.
Cash Flow Statement: Net Income is down by $12, but you add back the $20 loss since it’s non-cash. You also show the full proceeds received, $80, in Cash Flow from Investing, so cash at the bottom is up by $88.
Balance Sheet: Cash is up by $88, but PP&E is down by $100, so the assets side is down by $12. The L&E side is also down by $12 because retained earnings fell by $12 due to the Net Income decrease, so both sides balance.
A company decides to CHANGE a key employee’s compensation. It will offer the employee stock options instead of a real salary. The employee’s salary was formerly $100, but she will receive $120 in stock options now. How do the statements change?
Income Statement: Operating expenses increase by $20, so Pre-Tax Income falls by $20, and Net Income falls by $12 at a 40% tax rate.
Cash Flow Statement: Net Income is down by $12, but you add back the $120 in SBC as a non-cash expense, so cash at the bottom is up by $108.
Balance Sheet: Cash is up y $108, so the assets side is up by $108. On the L&E side, retained earnings is down by $12 because of the reduced Net Income, but Common Stock & APIC is up by $120 because of the SBC, so the L&E side is up by $108 and both sides balance
A company issues $100 in stock to new investors to fund its operations. How do the statements change?
Income statement: No change
Cash flow statement: The $100 stock issuance is a cash inflow in Cash Flow from financing, and there are no other changes, so cash at the bottom goes up by $100.
Balance Sheet: Cash is up by $100, so the Assets side is up by $100, and Common Stock & APIC on the other side goes up by $100, so the L&E side is up by $100 and the BS balances.
