In a bailout scenario where the government makes an equity investment of $100, which of the following statements correctly describes the effect on the three statements?

• A. IS: No changes; CFS: financing cash flow up by $100; net cash up $100; BS: cash up $100; SE up $100.
• B. IS: Net income increases by $100; CFS: CFO up by $100; BS: Cash up $100; SE up $100.
• C. IS: No changes; CFS: CFO up by $100; BS: Cash up $100; liabilities up $100.
• D. IS: No changes; CFS: financing cash flow down by $100; BS: Cash down $100; SE down $100.

Answer: (A)

An equity investment from the government is an owner-financing transaction. It does not affect operating income or expenses, so the income statement shows no change. The company receives cash, so assets rise by 100 and, correspondingly, shareholders’ equity rises by 100 due to the new equity issued. On the cash flow statement, this is a financing activity inflow of 100, not a change in operating cash flow, so net cash increases by 100. The balance sheet reflects cash up 100 and equity up 100, with no change to liabilities.