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To: rkral who wrote (62823)	1/30/2003 4:07:51 PM
From: GVTucker	Read Replies (1) \| Respond to of 77400

(1), reduce net cash provided by all activities, operating, financing, and investment on the Cash Flow Statement? or (2), reduce Assets, and therefore Liabilities & Stockholders' Equity, on the Balance Sheet? More specifically, does expensing a stock grant reduce Stockholders' Equity? I suspect the answer to all three questions is "NO", but don't know. I'm just an engineer. I believe that you're right, it's no, no, no, but I'm not positive.

To: rkral who wrote (62823)	1/30/2003 7:51:12 PM
From: RetiredNow	Read Replies (2) \| Respond to of 77400

Hi rkral, actually, the answer is yes to many of those: * operating cash flows would be reduced by the stock options expense amount, because net income is a factor in operating cash flows; however it would then be increased by the tax shield benefits; but the net net would be a reduction of operating cash flows if it was expensed * stockholder's equity would also be reduced if stock options were expensed, because net income is a part of retained earnings, which is a part of stockholder's equity

To: rkral who wrote (62823)	1/30/2003 11:52:17 PM
From: hueyone	Read Replies (4) \| Respond to of 77400

Re: Paying Employees with Stock Grants. Hi Ron: I am quite sure it summarizes out this way: a. Expenses increased. b. Taxes reduced. c. Net income reduced by value of stock grant less the tax savings. d. Net Cash Flow from Operations increased by the tax savings. e. Ending Period Cash and Cash Equivalents increased by tax savings. f. Assets increased by the tax savings. g. Shareholders Equity increased by the tax savings. h. Paid in Capital increased by total value of the stock grants. i. Retained Earnings decreased by change in net income--- the value of the stock grant less the tax savings. The explanation is here below: 1. Stock grants definitely increase expenses by the value of the grant and thus reduce net income. However, net income is not reduced by the full amount of the grant because taxes are reduced by virtue of higher expenses. So net income is reduced by the value of the grant less the tax savings. 2. This same net income, having been reduced by the stock grant less tax savings, is then carried off to two locations. The first location is the first line item in Cash Flow from Operations in the Cash Flow statement. But alas, net income has to be reconciled with net cash provided by operating activities, so the expense of this non cash stock grant, along with other non cash expenses included in net income such as depreciation and amortization, are added back to net income to arrive at Net Cash Flow Provided by Operations. So the only changes on the Cash Flow statement so far is that net income started out lower, but by the time we got to net cash flow provided by operations, the only change was an increase in Net Cash Flow Provided by Operations by the amount of the tax savings. 4. There are no changes in Cash Flows from Investing Activities. 5. There are no changes in Cash Flows from Financing Activities. 6. Next, Net Cash Provided by Operating Activities, Cash Flows from Investing Activities and Cash Flows from Financing Activities are summed to arrive at Change in Cash and Cash Equivalents. The only impact on Change in Cash and Cash Equivalents from granting the shares so far, is that the change has been increased by the amount of the tax savings. 7. This change in Cash and Cash Equivalents is then added to Cash and Cash Equivalents from the balance sheet at the beginning of the period to arrive at the new end of period Cash and Cash Equivalents, which then appears both on this Cash Flow statement and on on the end of period Balance Sheet. So now we have both end of period Cash and Cash Equivalents on the cash flow statement and Cash and Cash Equivalents on the new balance sheet increased by the amount of the tax savings. 8. But I said there were two places that the “Net Income” figure was going to go from the Income Statement. The first was the Cash Flow statement; the other is Retained Earnings in the new “Balance Sheet”. Our Net Income, which was reduced by the value of the stock grant net of tax savings, is now added to Retained Earnings from the beginning of period Balance Sheet to arrive at Retained Earnings on end of period Balance Sheet. 9. So let’s quickly udate again: On this new end of period Balance Sheet, we now have Cash and Cash Equivalents increased by the amount of the tax savings from making the stock grants, and we have Retained Earnings on the new Balance Sheet reduced by the amount of the value of the stock grant less the tax savings. 10. But we can’t stop there. Our Cash and Cash Equivalents” have increased, so our assets have increased, while our liabilities remained the same, so our Stockholder’s Equity should also increase by the amount of the tax savings, and we have to make one more adjustment before it does. 11. We have already reduced Retained Earnings and Shareholders Equity by the amount of the stock grant less the tax savings. So to balance out this reduced Shareholders Equity section with the increased Cash and Cash Equivalents section, we need to do the following: Add the entire value of the stock grant to Paid in Capital. 12. Voila!. Everything balances out: The net change in Shareholders Equity, after reducing Retained Earnings by the value of the stock grant less the tax savings, but adding the total value of the stock grant to Paid in Capital, is to increase Shareholder’s Equity by the amount of the tax savings. Now the change in Shareholder’s Equity on our end of period Balance Sheet is equal to our increase in Assets, or Cash and Cash Equivalents, which also increased by the amount of the tax savings. Regards, Huey