At the start of Year 1, after Apple borrows $100 to buy factories, which statement is true about the three financial statements?

At the start of Year 1, after Apple borrows $100 to buy factories, which statement is true about the three financial statements?

• A. Income Statement shows a $100 expense.
• B. Cash Flow from Investing decreases by $100.
• C. PP&E increases by $100 and Liabilities increase by $100.
• D. Cash Flow from Financing decreases by $100.

Answer: (C)

When a company borrows cash to buy a fixed asset, the transaction is financing the investment, so the immediate impact is on the balance sheet and not as an operating expense. The factories (PP&E) increase by the amount borrowed, and the same amount is added to liabilities as a loan payable. There is no immediate expense recorded on the income statement from simply purchasing the asset; depreciation would come later over the asset’s life, not at purchase. On the cash flow statement, you’d see two effects: cash flow from financing would rise by the loan amount, while cash flow from investing would fall by the purchase price of the asset. The net cash flow for that moment would be zero if these are the only activities. So the statement that PP&E increases by 100 and Liabilities increase by 100 correctly captures the immediate effect across the three statements: the balance sheet shows higher assets and higher liabilities, the income statement remains unaffected at the point of purchase, and the cash flow statements reflect both the financing inflow and the investing outflow. The other statements miss or misstate aspects of this combined impact, such as recording an expense or mischaracterizing the financing cash flow.

When a company borrows cash to buy a fixed asset, the transaction is financing the investment, so the immediate impact is on the balance sheet and not as an operating expense. The factories (PP&E) increase by the amount borrowed, and the same amount is added to liabilities as a loan payable. There is no immediate expense recorded on the income statement from simply purchasing the asset; depreciation would come later over the asset’s life, not at purchase.

On the cash flow statement, you’d see two effects: cash flow from financing would rise by the loan amount, while cash flow from investing would fall by the purchase price of the asset. The net cash flow for that moment would be zero if these are the only activities.

So the statement that PP&E increases by 100 and Liabilities increase by 100 correctly captures the immediate effect across the three statements: the balance sheet shows higher assets and higher liabilities, the income statement remains unaffected at the point of purchase, and the cash flow statements reflect both the financing inflow and the investing outflow. The other statements miss or misstate aspects of this combined impact, such as recording an expense or mischaracterizing the financing cash flow.