Connect the Three Statements

Step 1: Calculating the New EBIT

New EBIT = Baseline EBIT − Increase in D&A

New EBIT = $80.0m − $10.0m = $70.0m

EBIT falls dollar-for-dollar with the extra D&A, since depreciation sits above the EBIT line on the income statement — it's the mechanical starting point that then ripples through Net Income, CFO, and the balance sheet in the steps below.

Step 2: Calculating the New Net Income

New Net Income = (New EBIT − Interest Expense) × (1 − Tax Rate)

New Net Income = ($70.0m − $10.0m) × 0.75 = $60.0m × 0.75 = $45.0m

That's a decrease of $7.5m from the $52.5m baseline in Case 1 — less than the full $10.0m of extra D&A, because the tax rate shields 25% of that hit.

Step 3: Calculating the New CFO

New CFO = New Net Income + New D&A − Increase in Accounts Receivable − Increase in Inventory + Increase in Accounts Payable

New D&A = $30.0m + $10.0m = $40.0m

New CFO = $45.0m + $40.0m − $15.0m − $10.0m + $8.0m = $68.0m

That's an increase of $2.5m from the $65.5m baseline in Case 3 — even though Net Income went down. The $10.0m of extra D&A reduced Net Income by $7.5m after tax, but is added back in full on the cash flow statement, for a net CFO benefit of $2.5m — the D&A tax shield.

Step 4: Calculating the New PP&E, net

New PP&E, net = Baseline PP&E, net − Increase in D&A

New PP&E, net = $220.0m − $10.0m = $210.0m

The higher D&A directly reduces the net book value of PP&E, since depreciation is exactly the accounting mechanism that gradually writes down a fixed asset's carrying value over its useful life — the balance sheet has to reflect that the asset is one year "older."

Step 5: Verifying the Balance Sheet Still Balances

Δ Cash = New CFO − Baseline CFO = $68.0m − $65.5m = +$2.5m

Δ PP&E = −$10.0m

Δ Assets = Δ Cash + Δ PP&E = $2.5m − $10.0m = −$7.5m

Δ Retained Earnings = Δ Net Income = $45.0m − $52.5m = −$7.5m, and Δ Liabilities = $0

Δ Liabilities + Δ Equity = $0m + (−$7.5m) = −$7.5m = Δ Assets. The balance sheet still balances — exactly what double-entry accounting guarantees no matter how many statements a single change ripples through.

Final Results

• New EBIT: $70.0m (down $10.0m)
• New Net Income: $45.0m (down $7.5m)
• New CFO: $68.0m (up $2.5m, despite lower Net Income)
• New PP&E, net: $210.0m (down $10.0m)
• Balance sheet identity confirmed: Δ Assets = Δ Liabilities + Δ Equity = −$7.5m

This is the core insight that ties all three statements together: a non-cash expense like D&A lowers reported profit and the asset base, while actually increasing cash generation through its tax shield — and the balance sheet absorbs both effects and still balances.

Would you like to see the same walk-through for an increase in CapEx instead of D&A, or for a scenario where Atlas Manufacturing finances that CapEx with new debt?