A government bailout of $100 in equity typically has which effect on the three financial statements?

• A. Income statement unchanged; Cash Flows from Financing increase by $100; Balance Sheet shows cash up by $100 and shareholders' equity up by $100.
• B. Income statement unchanged; Cash Flows from Financing increase by $100; Balance Sheet shows cash up by $50 and shareholders' equity up by $50.
• C. Income statement increases by $100; Cash Flows from Financing increase by $100; Balance Sheet shows cash up by $100.
• D. Income statement unchanged; Cash Flows from Operations increase by $100; Shareholders' equity decreases by $100.

Answer: (A)

This question tests how an equity infusion from outside sources affects the financial statements. An equity bailout increases cash and increases shareholders’ equity, but does not affect the income statement since it isn’t revenue or an expense. In the cash flow statement, this is a financing activity because it changes the company’s capital structure, not its operating activities or investments. So you see a cash inflow in Financing of the full $100, and the balance sheet shows cash up by $100 and shareholders’ equity up by $100, with liabilities unchanged. The income statement remains unchanged.

That’s why the correct portrayal is: income statement unchanged; financing cash flow up by $100; balance sheet shows cash up $100 and shareholders’ equity up $100. The other options would imply either an operating or income impact, or only a partial amount of the infusion, which isn’t consistent with an equity-for-cash bailout.