After two years, the factories are written down to zero and the loan is paid off. Which of the following statements is true?

After two years, the factories are written down to zero and the loan is paid off. Which of the following statements is true?

• A. Net Income declines by $48; CFO increases by $32; Financing shows $100 loan payoff; Net Change in Cash falls by $68.
• B. Net Income declines by $80; CFO increases by $18; Financing shows $0; Net Change in Cash decreases by $62.
• C. Net Income increases; CFO unchanged; Financing outflow $100; Net Change in Cash increases.
• D. Net Income declines by $48; CFO decreases by $32; Financing shows $100 loan payoff; Net Change in Cash decreases by $12.

Answer: (A)

Depreciation lowers reported net income but does not use cash, so when you move from net income to cash from operations you add back the full depreciation expense. In this scenario the factories are fully depreciated after two years, so there will be no further depreciation expense in the future, but in the current period depreciation has reduced net income. The key nuance is how the after‑tax effect of that depreciation translates into cash flow from operations. The depreciation expense reduces pretax income by a certain amount, and taxes saved from that deduction reduce the hit to net income, so the net income decline may reflect the tax shield. The cash flow from operations, however, adds back the depreciation as a non‑cash charge, and the net effect on cash from operations ends up being a positive change smaller than the full depreciation amount due to taxes. In this case, the after‑tax impact on net income is a decline of 48, while the cash flow from operations increases by 32. Separately, paying off the loan is a financing outflow of 100, which shows up in the financing section of the cash flow statement. No other financing activity is mentioned, so that outflow directly reduces the net change in cash. Putting it together: cash from operations increases by 32, financing reduces cash by 100, so net change in cash falls by 68. This aligns with the described result.

Depreciation lowers reported net income but does not use cash, so when you move from net income to cash from operations you add back the full depreciation expense. In this scenario the factories are fully depreciated after two years, so there will be no further depreciation expense in the future, but in the current period depreciation has reduced net income.

The key nuance is how the after‑tax effect of that depreciation translates into cash flow from operations. The depreciation expense reduces pretax income by a certain amount, and taxes saved from that deduction reduce the hit to net income, so the net income decline may reflect the tax shield. The cash flow from operations, however, adds back the depreciation as a non‑cash charge, and the net effect on cash from operations ends up being a positive change smaller than the full depreciation amount due to taxes. In this case, the after‑tax impact on net income is a decline of 48, while the cash flow from operations increases by 32.

Separately, paying off the loan is a financing outflow of 100, which shows up in the financing section of the cash flow statement. No other financing activity is mentioned, so that outflow directly reduces the net change in cash.

Putting it together: cash from operations increases by 32, financing reduces cash by 100, so net change in cash falls by 68. This aligns with the described result.