How would a 50% equity and 50% debt purchase of a plants property or equipment fixed asset affect three financial statements?
I got this question for my IB's interview. Still don't know how to figure it out. Thanks guys for your help!
Let's say we purchase a $100 plant asset. This means $50 of stock was used and $50 of debt was used. The cash proceeds were all used to buy the plant asset. If you generally think about accounting journal entries for this purchase, I think it is quite clear that there are no income statement items. We are working with balance sheet accounts in this problem.
Best way to do these problems is think of changes to I/S, then CFS, and finally B/S.
I/S- Not affected. Of course there will be interest expense in the future from the debt which will impact net income. However, you didn't say 1 or 2 years in the future, so I'm only going to focus on the present right after the asset is acquired.
CFS- Capital expenditure of $100 means cash flows from investing drops by $100. However, in the cash from financing section, you have $50 from issuance of debt and $50 from issuance of stock. This means cash flows from financing goes up by $100. Since CFI went down by $100 and CFF went up by $100, net increase in cash is 0 or cash doesn't change at all.
B/S- PPE is up by $100. Assets are up by $100. Debt, which is a liability, went up by $50. Common stock, which is a stockholders' equity account, went up by $50. We know that assets= liabilities + stockholders' equity. $100 increase in assets is matched with $50 increase in liabilities and $50 increase in stockholders' equity. $100= $100 so we are balanced.
Hope this helps
Thank you so much! You have explained it so clearly. I forgot about the Capex part so I was confused.
Accusamus nostrum nihil neque expedita voluptatem sed. Asperiores et sint et nihil qui reiciendis facilis. Totam tenetur deserunt quaerat fuga sed laborum.
Enim perferendis delectus ea amet id autem. Exercitationem voluptas et quis velit qui iste necessitatibus. Nulla vel eum perferendis et veritatis maxime tempore deleniti. Repellendus molestiae omnis a ea voluptatem eum. Officia et ut velit qui voluptate. Aperiam libero eius labore quia maxime voluptas.
Perferendis voluptatem expedita est. Quo quisquam esse reiciendis quia atque excepturi totam. Ea quo nam asperiores sit ut vel et.
Non qui eligendi unde amet blanditiis aut ipsam. Aliquid sit consectetur libero. Sit doloribus debitis deserunt porro. Illo rem eos maxime sint et aut aperiam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...