You are correct in your summary of major accounting entries for stock options. If a company issues stock options amounting to a value of $100 (as in your example), let's say that Net Income goes down by $100 (ignoring taxes for simplicity). Therefore, CFO is also decreased by $100. Since these optio... You are correct in your summary of major accounting entries for stock options. If a company issues stock options amounting to a value of $100 (as in your example), let's say that Net Income goes down by $100 (ignoring taxes for simplicity). Therefore, CFO is also decreased by $100. Since these options are non-cash as noted, $100 is added back to CFO as a non-cash item.

That closes the "loop" on double-entry accounting. On the Balance Sheet, because Retained Earnings flows from Net Income, it will be reduced by $100 (but APIC will not increase). If APIC were to go up by $100, it would need an offsetting entry to comply with double-entry accounting. These options are assumed to be un-exercised at the time of issuance (which is when the compensation gets expensed); only when they are actually exercised will APIC increase (cash decreases). On the flip side, they'll typically issue additional shares to balance this out (refer to the Treasury method), which is the true cause for increasing APIC.

As you can see, there is no impact on the Income Statement. Note that sometimes, cashless conversions take place, in which previously repurchased shares are sold on the open market to pay for the difference between the strike price and the current stock price. For more information on the Treasury method, please refer to the "Treasury Options" chapter in the Supplementary Video Exhibits course, under the "Overview of Financial Markets + Exhibits" package. Read More

So what you are saying is:
*Asset side we have: NI -100, non-cash add back +100 = zero change on asset side
*Liabilities side we have: RE -100
THUS IT APPEARS Liabilities/SE side goes down by 100 with no corresponding decrease on the asset side? How can this work? I must be missing something.

Don't forget that NI does not directly impact the balance sheet; it flows through Retained Earnings. Thus, we would re-write/clarify as follows: 1) NI -100 which also means RE -100 on Liability side 2) Cash -100 on Asset side => double-entry balanced at this point However, since stock opti... Don't forget that NI does not directly impact the balance sheet; it flows through Retained Earnings.
Thus, we would re-write/clarify as follows:

1) NI -100 which also means RE -100 on Liability side
2) Cash -100 on Asset side
=> double-entry balanced at this point

However, since stock options are usually not paid in cash, the cash gets added back on the CF Statement:
1) In CFO section, SBC (Stock Based Compensation) +100 (thus CFO +100, thus cash +100 on BS Asset side)
2) offsetting entry is Treasury Stock on BS Liability side +100 (issuance of previously repurchased shares to account for the fractional share equivalent of the options)
=> double-entry balanced at this point

Thus, the actual entries (since cash doesn't go down and then up) would be:
1) NI -100 which also means RE -100 on Liability side
2) SBC (Stock Based Compensation) +100 => Treasury Stock on BS Liability side +100
3) No change to cash balance
=> double-entry balanced at this point Read More