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March/June 2016 Q1 Lirio and March/June 2018 Q3

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › March/June 2016 Q1 Lirio and March/June 2018 Q3

  • This topic has 1 reply, 2 voices, and was last updated 6 years ago by John Moffat.
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  • November 6, 2018 at 6:56 pm #484051
    davidlemonhhl
    Member
    • Topics: 7
    • Replies: 12
    • ☆

    Hello sir,

    when calculating dividend capacity in Requirement (b), why is the answer in BPP ignore the information of ‘The current depreciation charge already included in the operating profit margin…’? I added back $50m*25%

    In contrast, in March/June 2018, Q3 Arthuro Co, the answer provided added back $30m depreciation.

    Just got confused of these answers.

    THX in advance.

    November 7, 2018 at 8:50 am #484082
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    For Lirio, it is because of note 2 in the question – an investment equal to the depreciation is needed to keep the current productive capacity. So although depreciation is not a cash flow and is therefore added back, there is a cash outflow of the same amount – so no point in adding back and then subtracting the same amount.

    This is a common thing in questions set by the current examiner, and for that reason I explain it in my free lectures.

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