Please explain to me the following Q14 from Curriculum Concept checker (CFS):
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They had interest expense of $19 million but didn’t pay $3 million of it, so they paid $16 million in cash for interest.
They had tax expense of $6 million and paid an additional $4 million, so they paid $10 million in cash for taxes.
Hello,
You may also use the formula:
Cash paid for interest = interest expense - Interest payable increase (you REMOVE any increase of liability) = $16M
Cash paid for taxes = Taxes expense + Taxes payable decrease (you ADD any decrease in liability) = $10M
Cheers
I like S2000’s explanation better. He makes a complex, convoluted CFA formula into something that makes sense and we can all understand.
$19M interest expense --> payable of $19M on balance sheet (‘BS’). Delta on BS = +$3M so used to be $16M which has now been paid: $16M paid during the year.
$6M tax expense --> payable of $6M on BS. Delta on BS = -$4M so used to be $10M which has now been paid: $10M paid during the year.
Nothing complex, this is just basic accounting. To be honest, I still don’t understand S2000’s explanation even after reading it multiple times :-(. Current year’s expenses have not yet been paid (assumption) so you don’t pay ‘an additional’ amount, this doesn’t make sense… Maybe it helps to solve this specific case, but I don’t think it helps people understand the theory behind this.