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3-Statement Change: Buy Equipment for $100 Cash

Accounting & Financial Statements

The prompt

“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.”

📋 What you're given

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.

Line ItemValue
Equipment Purchase Price$100
Payment Method100% Cash
Useful Life5 years
Depreciation MethodStraight-line
Tax Rate25% (0.25)

Step 2: Immediate Impact at the Time of Purchase

Think about whether a cash purchase of equipment is an expense at all, the moment it happens.

Show Balance Sheet Impact Formula

PP&E (net) = PP&E (net, prior) + Equipment Purchase Price; Cash = Cash (prior) − Equipment Purchase Price

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

Step 3: Annual Depreciation Expense

Show Straight-Line Depreciation Formula

Annual Depreciation = Equipment Purchase Price / Useful Life (years)

Using this formula, compute the annual depreciation expense.

Step 4: Income Statement Impact of Depreciation

Think about how the tax rate affects how much Net Income actually falls once depreciation is expensed.

Show Net Income Impact Formula

Change in Net Income = − Annual Depreciation × (1 − Tax Rate)

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

Step 5: Cash Flow and Balance Sheet Impact of Depreciation

Show Cash Flow from Operations Formula

Change in CFO = Change in Net Income + Annual 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.

💡 Model answer

Try answering out loud first — then reveal the model answer and compare.

⚠️ Common mistakes

  • Recording an expense on the Income Statement at the moment of purchase — CapEx has no immediate P&L impact, only the Balance Sheet and Cash Flow Statement change
  • Forgetting that the equipment purchase appears in the Investing section of the Cash Flow Statement, not Operating
  • Applying the full depreciation amount as the cash impact, instead of the after-tax Net Income change plus the depreciation add-back
  • Confusing gross PP&E with net PP&E — depreciation reduces the net book value, not the original purchase price
  • Forgetting the tax shield: the actual boost to cash from depreciation equals Depreciation × Tax Rate, not the full depreciation amount

🔁 Follow-up questions

➡️ Related cases

Case 5 3-Statement Change: Depreciation Increases by $100 Case 6 3-Statement Change: Revenue Increases by $100 Case 7 3-Statement Change: Buy $100 of Inventory for Cash Case 8 3-Statement Change: Take Out a $100 Loan
← Previous Case 8: 3-Statement Change: Take Out a $100 Loan Next Case 10: 3-Statement Change: Accounts Receivable Increases by $50 →

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