Cash Withdrawal via SMA: Debit Balance and Equity Impact
An investor has an account with LMV $50,000, DR $20,000, EQ $30,000, and SMA $5,000. If the customer withdraws $3,000 in cash from the account, what are the new DR, EQ, and SMA balances?
When cash is withdrawn using SMA: (1) Cash withdrawal increases the loan from the firm: DR increases by $3,000 to $23,000. (2) Customer equity drops dollar-for-dollar: EQ drops by $3,000 to $27,000. (3) SMA is reduced dollar-for-dollar: SMA drops by $3,000 to $2,000.
Complete Analysis & Legal Rationale
Cash is borrowed from the broker-dealer. Assets (LMV) remain $50,000. Liabilities (DR) expand to $23,000. Net Equity = $50,000 - $23,000 = $27,000. SMA remaining = $5,000 - $3,000 = $2,000.
Mathematical Step-by-Step Derivation
- Step 1: New DR = $20,000 + $3,000 = $23,000 (loan increases).
- Step 2: New EQ = $30,000 - $3,000 = $27,000 (equity drops).
- Step 3: New SMA = $5,000 - $3,000 = $2,000 (SMA reduces).
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
Accurately adjusts all three balance sheet items: DR up $3k, EQ down $3k, SMA down $3k.
Reduces debit balance instead of increasing it.
Leaves DR and SMA unchanged.
Leaves equity unchanged, which violates the accounting equation.
Official Standard: Codifies debit expansion upon SMA cash disbursements.