How does a Loan affect the 3 statements

Based on the most helpful WSO content, here's how the loan impacts the three financial statements:

Year 1:

Income Statement:

1. Interest Expense: The company pays 5% interest on the $1,000,000 loan, which equals $50,000. This reduces EBIT by $50,000.
2. Assuming a tax rate of 30%, the tax shield from the interest expense is $15,000 ($50,000 * 30%).
3. Net Income decreases by $35,000 ($50,000 - $15,000).

Cash Flow Statement:

1. Operating Activities: Add back the non-cash interest expense tax shield of $15,000.
2. Financing Activities: The company receives $1,000,000 in cash from the loan. It also repays 10% of the principal ($100,000).
3. Net cash flow increases by $900,000 ($1,000,000 loan - $100,000 principal repayment).

Balance Sheet:

1. Assets: Cash increases by $900,000 (from the loan proceeds minus the principal repayment). PP&E increases by $1,000,000 (assuming the loan is used entirely for PP&E).
2. Liabilities: Debt increases by $900,000 ($1,000,000 loan - $100,000 principal repayment).
3. Equity: Retained Earnings decrease by $35,000 (from the Net Income impact).

Summary of Year 1:

• Income Statement: Interest expense reduces Net Income by $35,000.
• Cash Flow Statement: Net cash flow increases by $900,000.
• Balance Sheet: Cash increases by $900,000, PP&E increases by $1,000,000, Debt increases by $900,000, and Retained Earnings decrease by $35,000.

For subsequent years, the principal repayment and interest expense will decrease as the loan balance reduces. Adjust calculations accordingly for each year.

Sources: Difficult Accounting Technical - IBD, A company uses $50 of cash to buy PP&E, how does the EV change?, Write Down of PPE by 100, Specialty Lending (GS/TPG) - Any insights?, Today's Investment Banking Interview Question?