Question

How does Apple's purchase of $100 worth of new iPod factories with debt affect the three financial statements at the start of "Year 1"?

a) Income Statement:

i) Revenue increases by $100.
ii) Expenses increase by $100.
iii) Net income remains unchanged.

Answer 1

Apple's purchase of new iPod factories with debt will increase assets and liabilities on the balance sheet, with no immediate effects on the income statement, and it will be shown as a cash outflow in the investing activities on the cash flow statement.

Step-by-step explanation:

When Apple purchases $100 worth of new iPod factories with debt, this transaction would affect the company's financial statements in specific ways. Firstly, on the balance sheet, the $100 spent on the factories would be recorded as an increase in property, plant, and equipment (PP&E), thereby increasing assets. At the same time, there would be an increase in liabilities to reflect the new debt taken on to finance the purchase.

Regarding the income statement, there are no immediate effects such as an increase in revenue or expenses as the purchase itself does not directly impact the company's profitability during that period. Instead, the expenses related to the factories, such as depreciation, will affect the income statement over time.

Finally, on the cash flow statement, the purchase of the factories would be shown as a cash outflow in the investing activities section. Additionally, if the debt is equipped with an interest, it would later affect operating cash flow due to interest payments, though this impact would not be immediate in "Year 1."