Question

Describe impacts on the 3 financial statements (balance sheet, income statement and cash flow statement) of:

g. An asset write-down (impairment) of $100
h. A debt write-down (impairment) of $100
i. An issue of new shares for $500

j. An issue of new shares to employees as stock-based compensation for $500
k. A payment of dividends for $100
l. An expense of $50 of interest on a debt, 50% in cash and 50% in PIK (Paid-In-Kind i.e.

accrued) interest

Remark: consider all above questions as independent of each other.

Answer 1

g.  Two financial statements are impacted when taking an asset impairment loss. The asset impairment loss on income statement is reported in the same section where you report other operating income and expenses. An impairment loss ultimately reduces the profit your business reports for the period, but it has no immediate impact on the company's cash balance. You also write down the asset's carrying value that is reported on the balance sheet to the fair value you calculated.

In other words, reduce the current carrying value by the asset impairment loss. Going forward, you'll adjust the amount of depreciation you take each year because prior depreciation was based on the asset's old carrying value.

h. Writing off the debt directly impacts two accounting system accounts: Bad debt expense and Allowance for doubtful accounts. Changes in these accounts, in turn, involve other accounts and the firm's financial reports as follows:

Income Statement Impact: Companies report revenues earned during the period on the Income statement. When the period includes a bad debt write off, however, the Income statement does include the Bad debt expense balance as a line item. Items of this kind appear typically under "Operating expenses," below the Gross profit line. As a result, Bad debt expense from a write off lowers Operating profit and bottom line Net income.

Balance Sheet Impact: A bad debt write-off adds to the Balance sheet account, Allowance for doubtful accounts. And this, in turn, is subtracted from the Balance sheet Current assets category Accounts receivable. The result appears as Net Accounts receivable.

Statement of Changes in Financial Position (Cash Flow Statement): Bad debt expense also appears as a non-cash expense item on the Statement of changes in financial position (Cash flow statement). Bad debt expense from a write off is subtracted from Sales Revenues, lowering Total Sources of Cash.

i. When a company issues equity, the money raised appears on the cash flow statement, and the balance sheet reflects both the cash raised and the equity issued. However, an equity issuance does not affect the income statement.

j.  Income Statement Impact: Decreased Net income , Diluted Earnings per share.

  Balance Sheet Impact: There are several ways a company can compensate its stock option holders. Here, we will consider the following two ways

First- The Company can pay the difference between the predetermined price and the price on the date of exercise. Second- The Company has an option to issue additional shares in lieu of the stock options outstanding for the year. If the company goes by the second option, the company will increase its paid-up capital in lieu of issuing the additional shares.

Statement of Changes in Financial Position (Cash Flow Statement):   

If the company goes for the first option (paying the difference in cash), then it will have to record a cash outflow from Financing Activities in Cash Flow Statement. Thus, the Cash Flow from Financing Activities will be reduced by the same amount as the Cash on the Asset side of the Balance Sheet.
If the company goes for the second option of issuing shares instead of paying cash, then we there will be no impact on the Cash Flow Statement as no cash flow will happen.

k . Corporation's dividends are not an expense and therefore will not appear on its income statement. Cash dividends are a distribution of part of a corporation's earnings that are being paid to its stockholders. ... Earnings available for common stock is reported on the income statement.

When the dividends are paid, the effect on the balance sheet is a decrease in the company's retained earnings and its cash balance.

l . Income Statement:  Interest expense must be recorded (regardless of the fact that it is not being paid out in cash - interest expense up $10.More interest expense results in a income tax shield ,

Statement of Cash Flows
Net Income is down from the income statement,
PIK interest is then added back as it is not a cash expense (paid out in the form of additional debt).

Balance Sheet Assets side of the balance sheet is up due to the cash flowing in from the statement of cash flows.
Liabilities side of the balance sheet is up assuming that there is additional debt principal issued for the interest payment
Shareholder's Equity is down flowing in from net income on the income statement