What happens on the three statements when $100 of stock is issued to employees as stock-based compensation?

• A. Income Statement: Pre-Tax Income decreases by $100; Net Income decreases by $60. Cash Flow Statement: Net Income down $60 but SBC adds back $100, so cash increases by $40. Balance Sheet: Cash up $40; Common Stock & APIC up $100; Retained Earnings down $60; Equity up $40.
• B. Income Statement: Pre-Tax Income increases by $100; Net Income increases by $60. Cash Flow Statement: Net Income up $60; Balance Sheet: Cash up $60; Equity up $60.
• C. Income Statement: No change. Cash Flow Statement: SBC is a non-cash item with no effect. Balance Sheet: Cash unchanged; Equity unchanged.
• D. Income Statement: Pre-Tax Income decreases by $60; Net Income decreases by $60. Cash Flow Statement: Net Income down $60; Balance Sheet: Cash down $60.

Answer: (A)

Stock-based compensation is recorded as an expense at the grant’s fair value, so it reduces pretax income by the amount of the award. If the awards are worth 100, the company records a 100 reduction in pre-tax income. The tax effect then reduces net income further by the after‑tax amount; with a 40% tax rate, net income declines by 60.

Because this is a non-cash expense, the cash flow statement adds the 100 SBC back to net income when calculating cash from operations. Starting from a net income drop of 60 and adding back 100 non-cash expense yields a net cash from operations increase of 40.

On the balance sheet, cash increases by 40 from the operating cash flow effect, while equity changes reflect the non-cash nature of the transaction: common stock and APIC rise by 100 (reflecting the issuance of stock), and retained earnings fall by 60 (the after‑tax impact of the expense). Net equity increases by 40, balancing the 40 increase in cash and the overall asset increase.

This aligns with the idea that SBC reduces income (but not cash at grant), increases APIC, and shows a positive cash flow impact from the non-cash expense when reconciling net income to cash from operations. The other options conflict with the treatment of SBC as an expense, its non-cash nature, the tax effect, or the way it flows through cash and equity.