How would a $100 bailout affect the balance sheet?
I want to make sure I am understanding this correctly:
If a company were to receive a bailout, then the IS would not be affected because the company's revenue isn't affected in anyway.
The CFS would see an increase in $100 in the CFF section, due to the money it is receiving from the bailout.
And lastly, this is where I get confused, how would the balance sheet be affected by the bailout? I understand that the assets would increase to $100 due to the CFS, but would liability or equity then be affected to compensate for this increase in assets? If either, why?
Sorry if this questions been asked before, I just can't wrap my head around it.
depends if it's structured as a gov't loan or as equity. If the former, it is a liability, if the latter, treat like an equity raise and increase shareholder's equity. Typically it's equity.
If it was equity, then the company would hand out shares for the bailout? So basically common stock would increase and thus the equity would increase?
Yup, increase SE by $100 and cash by $100
Wouldn't the stocks contributed be the increase in shareholder's equity? Or are those two different things?
The cash that the government contributes to the business (the bailout) is what entitles the government to some sort of return. If the return that the government gets was that the cash would eventually have to be paid back to the government, it'd be treated like a loan, and would be a liability. If the return is "nothing" or a piece of the company (transfer of ownership to the government), then new shares (stock) would be doled out to the government and thats the "increase in shareholder's equity" portion. The number of shares doesn't matter, what matters is that the value of those shares is equal to the value of the cash provided to the business, so both sides of the balance sheet end up balancing ( A = L+SE)
Balance sheet would be affected in either liabilities or stockholders equity depending on type of bailout and cash is up
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