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Financial performance

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Financial performance

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by John Moffat.
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  • July 19, 2017 at 1:28 pm #397560
    mika84
    Member
    • Topics: 99
    • Replies: 149
    • ☆☆☆

    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.

    July 19, 2017 at 3:26 pm #397591
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    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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