If banks write down an asset by $100 with a 40% tax rate, which statement correctly describes the three statements?

If banks write down an asset by $100 with a 40% tax rate, which statement correctly describes the three statements?

• A. Net Income declines by $60; CFO increases by $40; Balance Sheet: Cash up $40; Asset down $60; Equity down $60.
• B. Net Income declines by $60; CFO decreases by $60; Assets increase by $60; Equity down $60.
• C. Net Income declines by $100; CFO increases by $100; Assets down $100; Equity down $100.
• D. Net Income declines by $40; CFO increases by $60; Assets decrease by $40; Equity down $40.

Answer: (A)

When a bank writes down an asset by 100, it creates a non-cash expense that lowers pre-tax income by 100. With a 40% tax rate, taxes decrease by 40, so net income falls by 60 (100 - 40). The write-down is non-cash, so in the cash flow from operations you add back the full 100 impairment. Net effect is an increase of 40 in CFO relative to the baseline. On the balance sheet, the asset’s carrying amount drops by 100. The CFO-driven cash increase of 40 raises cash, so total assets fall by 60 overall. Equity falls by 60 because net income is down by 60, while liabilities are unchanged. So the consistent picture is: net income down 60; CFO up 40; cash up 40; asset down 60; equity down 60.

When a bank writes down an asset by 100, it creates a non-cash expense that lowers pre-tax income by 100. With a 40% tax rate, taxes decrease by 40, so net income falls by 60 (100 - 40). The write-down is non-cash, so in the cash flow from operations you add back the full 100 impairment. Net effect is an increase of 40 in CFO relative to the baseline.

On the balance sheet, the asset’s carrying amount drops by 100. The CFO-driven cash increase of 40 raises cash, so total assets fall by 60 overall. Equity falls by 60 because net income is down by 60, while liabilities are unchanged.

So the consistent picture is: net income down 60; CFO up 40; cash up 40; asset down 60; equity down 60.