A company records $10 of stock-based compensation. Walk me through the three statements.

I'll assume a 25% tax rate and that the expense is deductible. Stock-based compensation is an operating expense, the same as cash wages. So pre-tax income drops by $10, tax drops by $2.50 and net income drops by $7.50. On the cash flow statement, I open with net income down $7.50. The company paid its people in shares, not cash, so the $10 comes back in as a non-cash expense. Cash flow from operations rises by $2.50, and that's the change in cash too. On the balance sheet, cash is up $2.50, so assets are up $2.50. Liabilities are unchanged. Inside equity there are two moves. Additional paid-in capital goes up by $10 for the shares granted, and retained earnings go down by $7.50. That nets to equity up $2.50, so the two sides agree.

I'll assume a 25% tax rate and that the expense is deductible. Stock-based compensation is an operating expense, the same as cash wages. So pre-tax income drops by $10, tax drops by $2.50 and net income drops by $7.50. On the cash flow statement, I open with net income down $7.50. The company paid its people in shares, not cash, so the $10 comes back in as a non-cash expense. Cash flow from operations rises by $2.50, and that's the change in cash too. On the balance sheet, cash is up $2.50, so assets are up $2.50. Liabilities are unchanged. Inside equity there are two moves. Additional paid-in capital goes up by $10 for the shares granted, and retained earnings go down by $7.50. That nets to equity up $2.50, so the two sides agree. Read literally, that says paying staff in stock leaves the company with $2.50 more cash, which is why I wouldn't stop there. The cost is real. It lands on shareholders through dilution, because the share count goes up and each existing share owns a smaller piece of the business. So I'd be careful with any cash flow or EBITDA figure that adds stock-based compensation back as if it were free. Either I treat it as an expense, or I put the new shares in the diluted share count. I shouldn't skip both. There's a caveat on tax. In practice the deduction comes when the award vests or is exercised, not when the expense is booked. Until then the $2.50 would be a deferred tax asset and cash would be flat.