If a company receives a $100 equity bailout, which statement is true?

• A. The income statement is not affected; cash flow from financing increases by $100; balance sheet shows cash and shareholders' equity up $100
• B. The income statement increases by $100; cash flow from financing unchanged; balance sheet unchanged
• C. The income statement decreases by $100; cash flow from financing decreases; balance sheet shows cash down $100
• D. Income statement unaffected; cash flow from investing increases; balance sheet cash decreases

Answer: (A)

The key idea here is that an equity bailout is a financing inflow, not an operating activity. When the company receives cash in exchange for equity, it increases cash on the balance sheet and increases shareholders’ equity by the same amount. Since this is not revenue or an expense, the income statement is unchanged. The cash flow statement will record this as a financing activity: cash flow from financing rises by the amount of the equity received.

So, the statement that best matches these effects is that the income statement is not affected; cash flow from financing increases by 100; and the balance sheet shows cash and shareholders’ equity up by 100. The other descriptions mix in operating or investing activity or suggest cash moves in the opposite direction, which isn’t the case for a pure equity infusion.