Accounting & Financial Statements
“Walk me through what happens across the income statement, cash flow statement, and balance sheet if a company takes out a $100 loan, first at the moment the loan is issued and then over the following year as it accrues interest, with everything else held constant.”
Walk me through what happens across the income statement, cash flow statement, and balance sheet if a company takes out a $100 loan, first at the moment the loan is issued and then over the following year as it accrues interest, with everything else held constant.
Task: trace the immediate balance sheet impact of taking out a $100 loan, then the Year 1 income statement, cash flow statement, and balance sheet effects once the loan starts accruing interest.
Before modeling the loan, here is the company's starting position and the terms of the new borrowing.
| Line Item | Value |
|---|---|
| Starting Cash | $1,000 |
| Starting Debt | $500 |
| New Loan Amount | $100 |
| Interest Rate on New Loan | 5% (0.05) |
| Tax Rate | 25% (0.25) |
Think about what happens on Day 0 when loan proceeds hit the company's accounts — and whether anything reaches the income statement yet.
ΔCash = +Loan Amount; ΔDebt = +Loan Amount; ΔNet Income = $0
Using this formula, compute the new Cash and Debt balances immediately after the loan is issued.
Interest Expense = Loan Amount × Interest Rate
Using this formula, compute the Year 1 interest expense on the loan.
ΔNet Income = -Interest Expense × (1 - Tax Rate)
Assume:
Using these inputs, compute the after-tax impact on Net Income, Retained Earnings, Cash Flow from Operations, and the ending Cash balance.
Try answering out loud first — then reveal the model answer and compare.
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