Immediately after issuing $100 of debt to buy $100 of Short-Term Securities, which statements change and how?

Immediately after issuing $100 of debt to buy $100 of Short-Term Securities, which statements change and how?

• A. Income Statement: No changes; Cash Flow from Investing decreases by $100; Cash Flow from Financing increases by $100; Cash at bottom unchanged; Balance Sheet: Short-Term Securities up $100 and Debt up $100
• B. Income Statement: $100 expense; Cash Flow from Investing increases by $100; Balance Sheet: Short-Term Securities up $100 and Debt up $100
• C. Income Statement: No changes; Cash Flow from Investing increases by $100; Balance Sheet: Short-Term Securities up $100 and Debt up $100
• D. Income Statement: No changes; Cash Flow from Financing decreases by $100; Balance Sheet: Short-Term Securities up $100 and Debt up $100

Answer: (A)

Issuing debt to buy assets affects financing and investing activities but does not change the income statement. When you issue $100 of debt, cash inflows under financing activities rise by $100. When you use that cash to purchase $100 of short-term securities, investing activities show an outflow of $100. The net effect on cash is zero, so the cash balance at the bottom remains unchanged. On the balance sheet, the short-term securities asset increases by $100 and the debt liability increases by $100, with no change to recorded income. That’s why the best description is no income statement impact, investing cash flow decreases by $100, financing cash flow increases by $100, cash remains the same, and the balance sheet reflects higher short-term securities and higher debt. The other descriptions would imply an expense, an investing cash inflow, or a financing cash outflow, which doesn’t match how this transaction unfolds.

Issuing debt to buy assets affects financing and investing activities but does not change the income statement. When you issue $100 of debt, cash inflows under financing activities rise by $100. When you use that cash to purchase $100 of short-term securities, investing activities show an outflow of $100. The net effect on cash is zero, so the cash balance at the bottom remains unchanged. On the balance sheet, the short-term securities asset increases by $100 and the debt liability increases by $100, with no change to recorded income.

That’s why the best description is no income statement impact, investing cash flow decreases by $100, financing cash flow increases by $100, cash remains the same, and the balance sheet reflects higher short-term securities and higher debt. The other descriptions would imply an expense, an investing cash inflow, or a financing cash outflow, which doesn’t match how this transaction unfolds.