How does a change in $100 change in stock based compensation affect the three statements?
I've got this question on interviews before and still do not know how to answer it. Would you need to use deferred tax?
Let’s assume a $100 increase:
IS: Pre-tax income down $100 due to added expense, NI down $80 @ a 20% tax rate
CF: Start with -$80 NI but add back $100 because SBC is a non-cash expense. Net cash is now up $20
BS: A: Cash up $20 | L/E: Retained earnings down $80 and Common Stock up $100 so net change up $20
Wouldn’t we need to factor in deferred taxes at all?
Yes, it does. I believe the IRS doesn't recognize non-cash based SBC so the cash taxes you pay will be higher than that implied by your provision for income taxes, creating a DTA.
This is correct – no idea why someone threw shit
IS: SBC is an expense that reduces PT income by 100. 40% tax rate leaves you with -60 NI.
CFS: -60 NI, but then need to add back the SBC because it’s non cash (the full 100). Ending change of cash is 40.
BS: Cash up by 40, so assets up by 40. SBC up by 100 so liabilities up by 100, since SBC is technically a wage expense/accrued expense. Retained earnings down by 60 because of the net income. Everything balanced
Okay that helps a lot thank you
Just like non cash expenses, only that likely DTA goes up rather than cash since SBC is not tax deductible when first booked.
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