Accounting & Financial Statements
“Walk me through what happens across the income statement, cash flow statement, and balance sheet if Depreciation & Amortization increases by $100 for the year, with everything else held constant.”
Walk me through what happens across the income statement, cash flow statement, and balance sheet if Depreciation & Amortization increases by $100 for the year, with everything else held constant.
Task: Starting from Solstice Components Inc.'s baseline figures below, compute the new EBIT, new Net Income, new Cash Flow from Operations, and new PP&E, net after a $100 increase in D&A — and confirm the balance sheet still balances.
Baseline figures before the D&A increase, plus the scenario change:
| Line Item | Amount |
|---|---|
| Baseline EBIT | $500 |
| Interest Expense | $50 |
| Tax Rate | 25% (0.25) |
| Baseline Net Income | $337.5 |
| Baseline D&A (included in EBIT) | $200 |
| Increase in Accounts Receivable | $60 |
| Increase in Inventory | $40 |
| Increase in Accounts Payable | $30 |
| Baseline CFO | $467.5 |
| Baseline PP&E, net | $1,500 |
| Increase in D&A (scenario) | $100 |
The extra D&A flows through operating expenses, reducing EBIT dollar-for-dollar.
New EBIT = Baseline EBIT - Increase in D&A
Using this formula, compute the new EBIT.
From the new EBIT, subtract Interest Expense (unchanged) and apply the tax rate.
New Net Income = (New EBIT - Interest Expense) × (1 - Tax Rate)
Using this formula, compute the new Net Income.
D&A is a non-cash add-back, so the higher D&A partially offsets the lower Net Income — working capital changes are unaffected by this scenario.
New CFO = New Net Income + New D&A - (Increase in AR + Increase in Inventory - Increase in AP)
Using this formula, compute the new CFO.
The extra depreciation also reduces the net book value of PP&E on the balance sheet.
New PP&E, net = Baseline PP&E, net - Increase in D&A
Using this formula, compute the new PP&E, net.
Δ Assets = Δ Cash + Δ PP&E; Δ Liabilities + Equity = Δ Retained Earnings (= Δ Net Income)
Using these formulas, confirm that Δ Assets = Δ Liabilities + Δ Equity — i.e., that the balance sheet still balances after all three statements update.
Try answering out loud first — then reveal the model answer and compare.
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