At the start of Year 1, Apple finances the purchase of $100 of factory assets entirely with debt. Which statement best describes the initial effect on the three statements?

At the start of Year 1, Apple finances the purchase of $100 of factory assets entirely with debt. Which statement best describes the initial effect on the three statements?

• A. Income statement shows a $100 expense; Cash Flow from Investing increases; Balance sheet PP&E increases by $100; Debt increases by $100.
• B. Income statement shows no change; Cash Flow from Investing decreases by $100; Cash Flow from Financing increases by $100; Balance sheet PP&E increases by $100; Debt increases by $100.
• C. Income statement shows no change; Cash Flow from Investing increases by $100; Cash Flow from Financing decreases by $100; Balance sheet PP&E increases by $100; Debt increases by $100.
• D. Income statement shows no change; Cash Flow from Investing decreases by $100; Cash Flow from Financing decreases by $100; Balance sheet PP&E decreases by $100; Debt decreases by $100.

Answer: (B)

Financing a purchase with debt changes the balance sheet and cash flow, but not the income statement at the time of the purchase. Buying factory assets is a capital expenditure, so PP&E rises by the asset amount, and since the purchase is funded by debt, liabilities (debt) rise by the same amount. The income statement remains unaffected because there’s no revenue or expense recorded when you simply acquire assets. On the cash flow statement, the investing section shows the cash used to buy PP&E as a cash outflow, while the financing section shows the cash received from issuing debt as a financing inflow. Here, investing cash flow decreases by 100 and financing cash flow increases by 100, which nets to zero change in overall cash for the period. So, PP&E up 100, debt up 100, income statement unchanged, investing cash flow down 100, financing cash flow up 100.

Financing a purchase with debt changes the balance sheet and cash flow, but not the income statement at the time of the purchase. Buying factory assets is a capital expenditure, so PP&E rises by the asset amount, and since the purchase is funded by debt, liabilities (debt) rise by the same amount. The income statement remains unaffected because there’s no revenue or expense recorded when you simply acquire assets.

On the cash flow statement, the investing section shows the cash used to buy PP&E as a cash outflow, while the financing section shows the cash received from issuing debt as a financing inflow. Here, investing cash flow decreases by 100 and financing cash flow increases by 100, which nets to zero change in overall cash for the period. So, PP&E up 100, debt up 100, income statement unchanged, investing cash flow down 100, financing cash flow up 100.