An asset write-down of $100 is recorded. With a 40% tax rate, which of the following best describes the impact on the three financial statements?

An asset write-down of $100 is recorded. With a 40% tax rate, which of the following best describes the impact on the three financial statements?

• A. Net income declines by $60; cash flow from operations increases by $40; shareholders' equity decreases by $60.
• B. Net income declines by $60; cash flow from operations declines by $40; shareholders' equity decreases by $60.
• C. Net income declines by $100; cash flow from operations unchanged; shareholders' equity declines by $100.
• D. Net income declines by $60; cash flow from operations increases by $0; shareholders' equity declines by $60.

Answer: (A)

An impairment write-down is a non-cash expense that hits the income statement, lowering pretax income by 100. With a 40% tax rate, the tax expense falls by 40, so net income declines by 60 (100 minus 40). On the cash flow statement, you start with net income and add back the non-cash impairment of 100, which pushes operating cash flow up by 40. On the balance sheet, the asset is reduced by 100, and the after-tax hit to net income reduces retained earnings (shareholders’ equity) by 60, so equity decreases by 60. The cash increase of 40 helps balance the reduced asset, leaving total assets down by 60 and total equity down by 60. This matches the described effect: net income declines by 60; cash flow from operations increases by 40; shareholders’ equity declines by 60.

An impairment write-down is a non-cash expense that hits the income statement, lowering pretax income by 100. With a 40% tax rate, the tax expense falls by 40, so net income declines by 60 (100 minus 40). On the cash flow statement, you start with net income and add back the non-cash impairment of 100, which pushes operating cash flow up by 40. On the balance sheet, the asset is reduced by 100, and the after-tax hit to net income reduces retained earnings (shareholders’ equity) by 60, so equity decreases by 60. The cash increase of 40 helps balance the reduced asset, leaving total assets down by 60 and total equity down by 60. This matches the described effect: net income declines by 60; cash flow from operations increases by 40; shareholders’ equity declines by 60.