Question

Recently, banks have been writing down their assets and taking huge quarterly losses. Walk me through what happens on the 3 statements when there’s a writedown of $100.

1. First, on the Income Statement, the $100 write-down shows up in the Pre-Tax Income line. With a 40% tax rate, Net Income declines by $60.
2. On the Cash Flow Statement, Net Income is down by $60 but the write-down is a noncash expense, so we add it back – and therefore Cash Flow from Operations increases by $40. Overall, the Net Change in Cash rises by $40.
3. On the Balance Sheet, Cash is now up by $40 and an asset is down by $100 (it’s not clear which asset since the question never stated the specific asset to write-down). Overall, the Assets side is down by $60.
On the other side, since Net Income was down by $60, Shareholders’ Equity is also down by $60 – and both sides balance.

Answer 1

When a bank writes down its assets and takes a quarterly loss, it affects the Income Statement, Cash Flow Statement, and Balance Sheet.

Step-by-step explanation:

When a bank writes down its assets and takes a quarterly loss, it affects the three financial statements - Income Statement, Cash Flow Statement, and Balance Sheet.

1. On the Income Statement, the write-down of $100 appears as a reduction in Pre-Tax Income. Assuming a 40% tax rate, Net Income declines by $60.
2. On the Cash Flow Statement, the write-down is a noncash expense, so it gets added back to Net Income. Cash Flow from Operations increases by $40, resulting in a net change in Cash of $40.
3. On the Balance Sheet, the write-down reduces an unspecified asset by $100, resulting in a decrease of $60 on the Assets side. Since Net Income was also down by $60, Shareholders' Equity decreases by the same amount to balance the equation.

In summary, the write-down affects the Income Statement, Cash Flow Statement, and Balance Sheet by reducing Net Income, increasing Cash Flow from Operations, and decreasing an asset and Shareholders' Equity.