In an equity bailout, which statement is true about the income statement?

• A. It is not affected
• B. It increases by the bailout amount
• C. It decreases by the bailout amount
• D. It is offset by financing cash flows only

Answer: (A)

Equity financing doesn’t affect the income statement. A bailout that injects equity changes the balance sheet and the financing section of the cash flow statement, not the company’s revenues or expenses. It increases cash and shareholders’ equity (paid-in capital or common stock) without recording revenue or operating costs, so net income remains unchanged in the period of the infusion. If there were any transaction fees, those would be expenses, but a pure equity infusion by itself does not alter the income statement. This is why the statement about the income statement being unaffected is the correct one.