Booking an asset purchase on the balance sheet
Question
Walk through what happens to a firm's balance sheet when it purchases an asset.
Short answer
It depends on how it is paid for. Paid in cash: PP&E rises and cash falls by the same amount, so total assets are unchanged. Financed with debt: assets and liabilities both rise. Over time depreciation reduces the asset's book value and, through the income statement, retained earnings in equity.
Adapted from Crack, Heard on the Street, Q5.4.14, p.53; question and answer rewritten by SelfMadeQuant.com.
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