Year 0 balance sheet effect of a $100 CapEx funded with cash would show which of the following?

• A. Cash decreases by $100; PP&E increases by $100; Shareholders' equity unchanged
• B. Cash increases by $100; PP&E increases by $100; Shareholders' equity unchanged
• C. Cash decreases by $100; PP&E decreases by $100; Shareholders' equity increases
• D. Cash unchanged; PP&E increases by $100

Answer: (A)

When you buy capital equipment with cash, you’re simply swapping one asset for another of the same value. Cash falls by 100, and PP&E rises by 100, so total assets stay the same. There’s no impact on liabilities or shareholders’ equity because you used internal cash rather than borrowing or issuing equity. Note that, in the year of the purchase, CapEx is capitalized and doesn’t hit the income statement as an expense, so net income isn’t affected at this moment. This is why the Year 0 balance sheet shows cash down and PP&E up by 100, with shareholders’ equity unchanged.