Question

Walk me through a $100 Write-Down of Debt – as in OWED Debt, a Liability – on a company’s Balance Sheet and how it affects the 3 statements.

Income Statement:Pre-Tax Income goesupby $100, and assuming a 40% tax rate, Net Income is up by $60.

Cash Flow Statement:Net Income is up by $60, but we need tosubtractthat Debt Write-Down because it was non-cash – so Cash Flow from Operations is down by $40, and Cash is down by $40 at the bottom.

Balance Sheet:Cash is down by $40 so the Assets side is down by $40. On the other side, Debt is down by $100 but Shareholders’ Equity is up by $60 because the Net Income was up by $60 – so Liabilities & Shareholders’ Equity is down by $40 and both sides balance.

Answer 1

A $100 write-down of debt on a company's balance sheet results in increased pre-tax income, decreased cash flow from operations, and changes in liabilities and shareholders' equity on the balance sheet.

Step-by-step explanation:

When a company writes down a debt of $100 on its balance sheet, it affects the three financial statements as follows:

Income Statement:

Pre-tax income increases by $100. Assuming a 40% tax rate, net income increases by $60.

Cash Flow Statement:

Net income increases by $60, but the debt write-down is a non-cash expense. So cash flow from operations decreases by $40, and cash is reduced by $40 at the bottom.

Balance Sheet:

The decrease in cash by $40 affects the assets side of the balance sheet. On the liabilities and shareholders' equity side, the debt is reduced by $100, but the net income increase of $60 causes shareholders' equity to increase by $60.

Therefore, both sides balance out, with liabilities and shareholders' equity decreasing by $40.