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John Moffat.
John Moffat.-
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mika84
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Easyyard Co had a cash balance of $100 million at the end of the year. The finance director believes that this should have been used to repay all of the non-current liabilities on the last day of the year. However this was not done.
What impact would repaying the non-current liabilities on the last day of the financial year have had on Return on equity.
Explanation: If the liabilities were repaid on the last day of the year, there would be no impact on profit before or after tax, as the interest expense would still be due in respect of the year.
I totally didn’t understand this logic, could you please explain?
Thank you.
John Moffat
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When calculating the profit, it is the interest charge that is subtracted – not the cash actually paid.
So whether or not they had paid the interest is irrelevant when calculating the profit – the interest would still be an expense for the year.
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