Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › residual profit
- This topic has 7 replies, 2 voices, and was last updated 3 years ago by John Moffat.
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- February 27, 2021 at 8:56 am #611904
sir what does a negative residual profit indicate? that the the company has paid dividends beyond FCF to equity available?
February 27, 2021 at 8:59 am #611906Yes. So part of the dividend has been paid out of retained earnings.
February 27, 2021 at 9:00 am #611907or may be company funded it through debt borrowing?
February 27, 2021 at 9:03 am #611908can we say that?
February 27, 2021 at 9:22 am #611946No. By law dividends can only be paid out of retained earnings. Where the cash comes from is not relevant.
February 27, 2021 at 9:44 am #611950so then how do we comment on a negative residual profit figure?
using retained earnings to fund dividends is normal. but we gotta to have some point to criticise the negative residual profit figure.
February 27, 2021 at 1:19 pm #611985sir can we say that high residual profits mean that the company is not reinvesting into capital assets as much as it can?
February 27, 2021 at 3:32 pm #612007It is a statement of fact that the more they are distributing as dividend then the less they are reinvesting!! That does not mean it is good or bad or should be criticised – it depends on the reasons and the policies of the company.
Most companies will want a policy of dividend growth and this can only be achieved in the long term by retaining and reinvesting – the more the retention the more the growth.
At the same time, most large companies will have a policy of growing dividends and in years when profit are low might still keep growing the dividend in order to keep investors satisfied even if some year that means the dividend is higher than the distributable profits.This is all Paper FM. The only difference in Paper AFM is that you are expected to analyse what is happening and make comments on the policy and decisions of the company – just as you would be expected to in real life.
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