3-Statement Change: Buy Equipment for $100 Cash

As a financial analyst, you are asked to walk through how a company's three financial statements change when it purchases $100 of equipment for cash — first at the moment of purchase, and then in the following period once depreciation begins.

1. Task Overview

Task: Trace the impact of a $100 cash purchase of equipment on the Income Statement, Cash Flow Statement, and Balance Sheet immediately at purchase, then trace the impact of the first year's depreciation once it begins.

Step 1: Given Data — The Transaction

A company purchases equipment for $100, paid entirely in cash, and will depreciate it straight-line.

Step 2: Immediate Impact at the Time of Purchase

At the moment of purchase, no expense hits the Income Statement — cash simply converts into a fixed asset of equal value.

Using this, determine the immediate Balance Sheet and Cash Flow Statement impact of the purchase.

Step 3: Annual Depreciation Expense

Once the equipment is placed into service, the company begins recognizing depreciation over its useful life.

Using this formula, compute the annual depreciation expense.

Step 4: Income Statement Impact of Depreciation

Depreciation lowers EBIT, and the resulting tax shield means Net Income falls by less than the full depreciation amount.

Using this formula, compute the change in Net Income once depreciation begins.

Step 5: Cash Flow and Balance Sheet Impact of Depreciation

Assume:

• No change in Net Working Capital
• No further Investing or Financing activity during the period

Using these inputs, compute the resulting change in cash, the net book value of PP&E, and Retained Earnings at the end of the first depreciation period.