How would a purchase of PPE financed using 50% debt and 50% equity flow through the three statements for year one and year two? I did a search but couldn't find a solid answer. A walkthrough would be greatly appreciated.
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Let's assume that $100 PP&E were to be financed using 50% debt (with no interest/principal payments just for the sake of simplicity) and 50% equity with a depreciation period of 10 years ($10 depreciation per year).
Basically the changes after two years would be:
Income Statement: Depreciation down 20 Assuming tax 40%, net income will be down 12.
Cash Flow Statement: Net income is down 12 Depreciation is added back (up 20) CapEx is down 100 (referring to total $100 spent for PP&E) LT Debt is up 50 (referring to $50 debt issued for PP&E) Net change in cash = down by 42
Balance Sheet: Cash is down by 42 PP&E = $100 (CapEx) - 20 (depreciation) = 80 Total Assets = 80 - 42 = 38
LT Debt is up 50 Net income flows to Retained Earnings = down by 12 Total Liabilities & SE = 50 - 12 = 38
And both sides balance.
You could make it more complicated by adding in interest/principal repayments but the concept will be basically the same.
Im pretty sure you are wrong on this one. You forgot the fact that you are financing 50% of this purchase with equity so you did not show the change in SE.
assuming $5 in depreciation, no principal payments and $5 in interest lets start in year 0
IS: No change CFS: CF from investing is down 100 for capex; CF from financing is up 100 50 from issuing debt and 50 from issuing stock BS: assets are up 100 from PPE; LTD is up 50 and SE is up 50
Year 1 IS: NI is down 6 assuming 40% tax rate CF: NI is down 6, add back depreciation so you are down $1 in Net Cash BS: Cash is down 1, PPE is down $5 so assets are total down $6 which balances with RE which is down $6
Year 2 has the same effects
Yea never mind your scenario is correct. I just assumed when he meant equity he meant issuing equity as opposed to cash
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