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Hi Sir,
1) While calculating the Value of MBO, why wasn’t depreciation added back?
It says in the later part of the question that the amount of reinvestment is equal to the depreciation charged, but is the same applied to the Manufacturing business to? If yes, then could you please briefly explain why?
2) I am having a tough time trying to understand that from where in the question should I take the hint that the financial statements are to be made just after the reconstruction and not 1 year after.
Thank You!3) In your 3rd reply at https://opentuition.com/topic/chrysos-jun-17/ , you said that the depreciation is relevant. Why is it relevant? If it is, why haven’t then we adjusted the interest payments in SOFP?
1. As I do explain in my free lectures, the current examiner always assumes that the amount needed to maintain the assets is the same as the depreciation. So although the depreciation itself is obviously not a cash flow, there is a cash flow of the same amounts. So there is no point in adding it back and then subtracting the same amount.
2. When it is a restructuring it will always be the SOFP immediately after he restructuring. It wouldn’t really make any sense for it to be a year later.
3. I wrote that the depreciation is relevant for the purpose of estimating the future value. It is not relevant for the SOFP because this is immediately after the restructuring.
2) So in a restructuring question, we should always make the SOFP just after the restructuring until mentioned otherwise?
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