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John, for question BPP 19.4, I don’t understand the following 1) Why do they not take operating profit as it is given in the question: $350. Which one should we take in the exam? 2) Why do they add the interest paid of $75 when we decrease it in our example since it is cash out. In the problem its labeled interest paid, but in the answer they rename it as interest expense and that is indeed added back when I look at our lecture notes. What is the difference, why do they rename it? 4) Why do they subtract interest received? 5) I left a comment under the lecture for cash receipts as other people have asked this question before but I still don’t get it. Wanted to keep it organized.
Thank you!
Rachel
You have to use the operating profit – the profit before the interest expense.
It does not matter whether you start with the actual operating profit or whether you start with the profit after interest and then add back the interest. The end result is the same.You are required by the accounting standard to then show as a separate item the interest actually paid.
The interest expense in the SOPL might not be the same as the interest actually paid (there could be interest owing at the end of the year).
I do make this point in the free lectures (and exactly the same logic applies to tax).
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