A company makes a $100 cash purchase of equipment on Dec. 31. How does this impact the three statements this year and next year?

First year:

If purchased before end of the year:

Balance Sheet:  Decrease in total assets because net book value will decrease

Income Statement : Decrease in net income because of depreciation

Statement of Cash Flows : Decrease for the amount paid

If purchased at the end of the year:

Balance Sheet:  No impact/effect (offsetting)

Income Statement: No impact (No depreciation yet)

Statement of Cash Flows : Decrease for the amount paid

Second year

Balance Sheet:  Decrease in total assets

Income Statement: Decrease in Net Income

Statement of Cash Flows : No impact

Current Year: No Depreciation for the fist year so income statement is not affected. In the Balance sheet Cash and Equipments (Fixed assets)  are self adjusted by a decrease and increase. Cash flow statement:  No change to cash flow from operations however decrease due to investing activities.No change in financing activities.

Second Year :  Effect of Depreciation and Taxes (if any) and their reflections in three statements.

First year:

Balance Sheet: Decrease in assets (cash)  and increase in assets (equipment)

Income Statement : none

Statement of Cash Flows : Decrease for the amount paid

Second year

Balance Sheet: Decrease in assets and increase in accum. depreciation

Income Statement: Decrease in Net Income (depreciation)

Statement of Cash Flows : none

VENKITARAMAN Agree With Mr

AGREE WITH MR VENKITARAMAN & MISS LESELY ANSWERS 

current year increase in fixed asset & decrease in Cash 

next year we will depreciate the fixed asset which will lead to increase in depreciation expenses(( report in income statement)) and accumulated depreciation  (( report in liabilities in balance sheet ))

also

the fixed asset in the end of next year will be with it.s historical value 

and accumulated depreciation will be subtract from it such following

fixed assets  (( *** ))

subtract

accumulated derpreciation ( *** )

net fixed asset  ((***))   

First Year:  Let’s assume that the company’s fiscal year ends Dec.31.  The relevance of the purchase date is that we will assume no depreciation the first year.  Income Statement:  A purchase of equipment is considered a capital expenditure which does not impact earnings.  Further, since we are assuming no depreciation, there is no impact to net income, thus no impact to the income statement.  Cash Flow Statement:  No change to net income so no change to cash flow from operations.  However we’ve got a $100 increase in capex so there is a $100 use of cash in cash flow from investing activities.  No change in cash flow from financing (since this is a cash purchase) so the net effect is a use of cash of $100.  Balance Sheet:  Cash (asset) down $100 and PP&E (asset) up $100 so no net change to the left side of the balance sheet and no change to the right side.  We are balanced.

Second Year:  Here let’s assume straightline depreciation over5 years and a40% tax rate.  Income Statement:  Just like the previous question:  $20 of depreciation, which results in a $12 reduction to net income.  Cash Flow Statement:  Net income down $12 and depreciation up $20.  No change to cash flow from investing or financing activities.  Net effect is cash up $8.  Balance Sheet:  Cash (asset) up $8 and PP&E (asset) down $20 so left side of balance sheet doen $12.  Retained earnings (shareholders’ equity) down $12 and again, we are balanced.

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VENKITARAMAN Agree With Mr