Please help.
The Company had on its balance sheet equipment worth 100 dollars. In the current period, it sold this equipment for $50. How did it affect the 3 reporting forms?
Thanks!
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Income Statement:
We see that the company has an "other loss" of $50 (since the selling of equipment does not occur on a regular basis). Now assume that the tax rate is T.
The firm will receive a tax refund of $50(1-T) at the end of the year.
Thus net income is reduced by $(50- 50(1-T))$.
Balance Sheet:
The company receies $50 Cash, so Cash goes up by $50. Similarly, Equipment goes down by $100. The firm also has an income tax receivable of $50(1-T)$. From the income statement, we know that retained earnings will down by $(50-50(1-T))$ due to the transaction
(Note you can easily verify as a sanity check that Assets moves by the same amount as Liabilities + SE after the transaction)
Cash Flows:
From the Balance Sheet we know that net cash received from the transaction by the end of the period (here we are assuming that the receivable is received by the end of the year) is $50 + 50(1-T)
We know that the change in net income due to the transaction is $-50 + 50(1-T)$. Now since losses are non cash, we need to add back in $!100-50) = 50 in the operating section of the cash flow. Finally, we need to add back in $50 in the investing section from the sale of equipment. Thus the net change in the cash flow to the firm is $50 + 50(1-T)$ which matches the information we have on the balance sheet.
Sorry for the confusion. The refund is actually $50*T. It's not letting me edit now.
Thanks!
So if we assume that the tax rate is 20% it would look like this:
IS:
other loss: 50;
income before tax: goes down by 50;
tax: goes down by 10;
NI: goes down by 40.
CF:
NI: -40;
Non-cash charges: +50;
CFO: +10;
Sale of Equipment: +50;
CFI: +50;
Total change in cash: +60.
BS:
Cash: +60;
Equipment: -100;
Assets: -40.
RE: -40.
Liabilities and capital: -40.
Yep this is how it would be by end of period.
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