In Year 3, the factories are written down by 80 and the loan must be paid back now. Which of the following describes the impact on the three statements?

In Year 3, the factories are written down by 80 and the loan must be paid back now. Which of the following describes the impact on the three statements?

• A. Income statement shows pre-tax income up by 80; tax reduces NI by 32; CFO up 48; Financing -100; Net cash -52.
• B. Income statement shows pre-tax income down by 80; tax reduces NI by 48; CFO from operations up 32; Financing -100; Net cash -68; Assets down 148; Debt down 100; Equity down 48.
• C. No changes on any statement.
• D. Income statement shows pre-tax income down by 80; CFO down by 100; Cash flow from financing up by 100.

Answer: (B)

Impairment of assets is a non-cash charge that hits the income statement and the balance sheet, while also affecting cash flow through the way you handle taxes and non-cash items. When the factories are written down by 80, pretax income falls by 80. With a tax rate of 40%, tax expense falls by 32, so net income drops by 48. In the cash flow from operations, you add back the 80 non-cash impairment, so CFO increases by 32. Separately, you pay back the loan, causing a financing cash outflow of 100. Net cash therefore decreases by 68 (32 up from operations minus 100 financing). On the balance sheet, assets decrease by 80 from the write-down and by 68 from the cash outflow, totaling a drop of 148. Liabilities decrease by 100 due to loan repayment, and equity decreases by 48 due to the lower net income. Everything still balances (assets down 148; debt down 100 and equity down 48).

Impairment of assets is a non-cash charge that hits the income statement and the balance sheet, while also affecting cash flow through the way you handle taxes and non-cash items.

When the factories are written down by 80, pretax income falls by 80. With a tax rate of 40%, tax expense falls by 32, so net income drops by 48. In the cash flow from operations, you add back the 80 non-cash impairment, so CFO increases by 32. Separately, you pay back the loan, causing a financing cash outflow of 100. Net cash therefore decreases by 68 (32 up from operations minus 100 financing).

On the balance sheet, assets decrease by 80 from the write-down and by 68 from the cash outflow, totaling a drop of 148. Liabilities decrease by 100 due to loan repayment, and equity decreases by 48 due to the lower net income. Everything still balances (assets down 148; debt down 100 and equity down 48).