Accounting & Financial Statements
“Walk me through what happens across the income statement, cash flow statement, and balance sheet if a company recognizes a $100 Goodwill impairment that is not deductible for tax purposes, with a 25% tax rate and everything else held constant.”
Walk me through what happens across the income statement, cash flow statement, and balance sheet if a company recognizes a $100 Goodwill impairment that is not deductible for tax purposes, with a 25% tax rate and everything else held constant.
Task: Starting from Ashford Consumer Products Inc.'s baseline figures below, compute the new EBIT, new Net Income, new Cash Flow from Operations, and new Goodwill balance after a $100 Goodwill impairment — and confirm the balance sheet still balances.
Baseline figures before the impairment, plus the scenario change:
| Line Item | Amount |
|---|---|
| Baseline EBIT | $600 |
| Interest Expense | $60 |
| Tax Rate | 25% (0.25) |
| Baseline Net Income | $405.0 |
| Baseline D&A (included in EBIT, unrelated to Goodwill) | $150 |
| Baseline Cash Flow from Operations (CFO) | $555.0 |
| Baseline Goodwill, net | $800 |
| Goodwill Impairment (scenario) | $100 |
The impairment is recorded as an operating expense, reducing EBIT dollar-for-dollar — just like any other non-cash charge.
New EBIT = Baseline EBIT − Goodwill Impairment
Using this formula, compute the new EBIT.
This is where a Goodwill impairment differs from Depreciation: because the impairment is not deductible for tax purposes, it creates no tax shield — tax is still calculated on the pre-impairment taxable income.
Taxable Income = Baseline EBIT − Interest Expense; Tax Expense = Taxable Income × Tax Rate; New Net Income = (New EBIT − Interest Expense) − Tax Expense
Using this formula, compute the new Net Income.
The impairment is non-cash, so it is added back in full — with no offsetting tax shield to worry about.
New CFO = New Net Income + Baseline D&A + Goodwill Impairment (non-cash add-back)
Using this formula, compute the new CFO.
The impairment directly reduces the carrying value of Goodwill on the balance sheet.
New Goodwill, net = Baseline Goodwill, net − Goodwill Impairment
Using this formula, compute the new Goodwill, net.
Δ Assets = Δ Cash + Δ Goodwill; Δ Equity = Δ Retained Earnings = Δ Net Income; confirm Δ Assets = Δ Liabilities + Δ Equity
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.
No comments yet — be the first to ask a question.