If a company purchases $200 of PPE with cash, which of the following statements is true in the investing activities view?

If a company purchases $200 of PPE with cash, which of the following statements is true in the investing activities view?

• A. Income statement: no change; PPE increases by 200; Cash decreases by 200; CFI decreases by 200.
• B. Income statement: depreciation is recognized immediately; PPE increases by 200; Cash decreases by 200; CFO decreases by 200.
• C. Balance sheet: assets increase by 200; Cash decreases by 200; I/S unaffected; CFS unaffected.
• D. Income statement: depreciation recognized now; PPE decreases by 200; Cash increases by 200; CFI increases by 200.

Answer: (A)

When PPE is purchased with cash, it falls under investing activities. There’s no immediate impact on the income statement because you’re not earning revenue or recording an expense at the moment of purchase; depreciation will come later as the asset is used. On the balance sheet, PPE increases by 200 and cash decreases by 200, so total assets stay the same. On the cash flow statement, this shows up as a 200 outflow in the investing activities section. The other descriptions mix up timing or effects. Depreciation isn’t recognized at the time of purchase, so there’s no depreciation impact right away and no drop in operating cash flow from this purchase. If PPE were to decrease or cash increase, that would imply selling PPE, not buying it, which isn’t the case. And saying the cash flow statement is unaffected ignores the investing outflow that must be recorded.

When PPE is purchased with cash, it falls under investing activities. There’s no immediate impact on the income statement because you’re not earning revenue or recording an expense at the moment of purchase; depreciation will come later as the asset is used. On the balance sheet, PPE increases by 200 and cash decreases by 200, so total assets stay the same. On the cash flow statement, this shows up as a 200 outflow in the investing activities section.

The other descriptions mix up timing or effects. Depreciation isn’t recognized at the time of purchase, so there’s no depreciation impact right away and no drop in operating cash flow from this purchase. If PPE were to decrease or cash increase, that would imply selling PPE, not buying it, which isn’t the case. And saying the cash flow statement is unaffected ignores the investing outflow that must be recorded.