After Year 3, with a $80 PP&E write-down and $100 loan payoff, which statement is true about the Net Change in Cash?

After Year 3, with a $80 PP&E write-down and $100 loan payoff, which statement is true about the Net Change in Cash?

• A. Up by $68
• B. Up by $40
• C. Down by $68
• D. Down by $20

Answer: (C)

The key idea is how non-cash charges and cash outflows show up on the cash flow statement using the indirect method. An $80 write-down on PP&E is a non-cash expense that reduces net income, but when reconciling net income to cash from operations you add back that $80 because it did not actually use cash. The $100 loan payoff, on the other hand, is a real cash outflow recorded in financing activities. If these are the only items affecting cash, the net change in cash is -$100 plus +$80, which equals -$20. So cash decreases by $20. The impairment boosts operating cash flow in the reconciliation, while the loan payoff drags cash down in financing activities, and together they yield a net decrease of $20.

The key idea is how non-cash charges and cash outflows show up on the cash flow statement using the indirect method. An $80 write-down on PP&E is a non-cash expense that reduces net income, but when reconciling net income to cash from operations you add back that $80 because it did not actually use cash. The $100 loan payoff, on the other hand, is a real cash outflow recorded in financing activities. If these are the only items affecting cash, the net change in cash is -$100 plus +$80, which equals -$20. So cash decreases by $20. The impairment boosts operating cash flow in the reconciliation, while the loan payoff drags cash down in financing activities, and together they yield a net decrease of $20.