What are the typical effects on the three financial statements when a company records a $100 asset write-down?

What are the typical effects on the three financial statements when a company records a $100 asset write-down?

• A. Income Statement: Pre-Tax income decreases by $100; Net Income decreases by $60. Cash Flow Statement: Cash Flow from Operations increases by $40. Balance Sheet: Cash increases by $40; Assets decrease by $100; Shareholders' Equity decreases by $60.
• B. Income Statement: Pre-Tax income decreases by $60; Net Income decreases by $60. Cash Flow Statement: Cash Flow from Operations increases by $60. Balance Sheet: Cash decreases by $60; Assets decrease by $60.
• C. Income Statement: Pre-Tax income increases by $100; Net Income increases by $60. Cash Flow Statement: Cash Flow from Operations decreases by $40. Balance Sheet: Cash increases by $60; Assets increase by $60.
• D. Income Statement: Pre-Tax income decreases by $50; Net Income decreases by $30. Cash Flow Statement: Cash Flow from Operations increases by $60. Balance Sheet: Cash increases by $100; Assets decrease by $40.

Answer: (A)

A write-down is an impairment that lowers the asset value and creates a loss on the income statement for the same amount. Here, recording a 100 write-down reduces pretax income by 100. With a 40% tax rate, taxes fall by 40, so net income drops by 60. The write-down is non-cash, so when reconciling to cash flow from operations, you add back the 100 non-cash expense, which, after considering the lower net income, results in a net cash flow from operations increase of 40 relative to the prior period. On the balance sheet, assets fall by 100 due to the write-down, shareholders’ equity falls by 60 because net income declined, and cash rises by 40 from the higher operating cash flow, so assets are down 60 overall and equity is down 60, keeping the books balanced. The other options misstate either the pretax impact, the after-tax net income effect, or the cash flow adjustment.

A write-down is an impairment that lowers the asset value and creates a loss on the income statement for the same amount. Here, recording a 100 write-down reduces pretax income by 100. With a 40% tax rate, taxes fall by 40, so net income drops by 60. The write-down is non-cash, so when reconciling to cash flow from operations, you add back the 100 non-cash expense, which, after considering the lower net income, results in a net cash flow from operations increase of 40 relative to the prior period. On the balance sheet, assets fall by 100 due to the write-down, shareholders’ equity falls by 60 because net income declined, and cash rises by 40 from the higher operating cash flow, so assets are down 60 overall and equity is down 60, keeping the books balanced. The other options misstate either the pretax impact, the after-tax net income effect, or the cash flow adjustment.