While working on one of the CF statement questions, I can’t think of it clearly… ABC Corp. reported interest expense $19M and taxes expense $6M. Interest payable increased by $3M and tax payable decrease by $4M. How much cash did the company pay for interest and taxes? I view both Interest Payable and Tax Payable as liablilites. So my understanding is if interest payable increased by $3M, interest expense (also a liability, right?) will increase by the same amount which results in $22M. And if tax payable decreased by $4M, tax expense will be reduced by the same amount which results in $2M. Why am I wrong?
this question pertains to cash flow(calculated only when actual cash flows … not accrual accounting) … Interest payable and tax payable are liabilities(accrual accounting) from previous years … this is tax that has to be paid but not yet been paid in cash so far … so if it decreases that means cash has been paid for it … so cash paid for tax = tax expense - ( ending tax payable - beginning tax payable ) = 6 - (-4) = 10M meaning he has paid for this years tax entirely and 4M for the previous years tax… the same calculation holds good for interest cash as well… HTH.
I see. What a twist! decrease here means increase… But thx, you explained well. Interest payable increased by $3M means this amount of interest accrued from previous year has not been paid yet. So it should increase this year’s total interest expense to $22M. No?
consider this scenario : lets start from 2006 2006 : beginning tax payable : 0 total tax expense : 10 M cash paid for tax expense : 5 M ending tax payable : 5 M 2007: beginning tax payable : 5 total tax expense :20 cash paid for tax expense : 2M ending tax payable : 23 Does this help?
interest paid = - interest expense + increase in interest payable = - 19 + 3 = -16M is this right ??
interest paid = interest expense - increase in interest payable
what i want to ask is whether 16 is right answer?? thnx for help
Yes, 16M is the right anser. I’m clear about the scenario and the formula. cash paid for interest = interest expense - (ending interest payable - beginning interest payable) Yet still need time to fight and digest this… e.g. If I have to pay interest $100 in 2008 and the Interest Payable (accrued from 2007) increased by $2 (meaning I did not pay this 2 bucks in 2007 and will have to pay in 2008), it’s just natural to me to pay $102 instead of $98 in 2008.
what do you mean by interest payable increased by 2? If this 2 is for 2007 then 2008 starting interest payable is 2 … yes in 2008 your interest expense would be 102 but what about the ending interest payable in 2008 … the interest cash would depend on whether it increased or decreased… Interest payable is something you owe but have not paid it so far … assume for 2007 you owe me 100$ but did not pay a single penny. So 2008 beginning payable would be 100. You lend 100 bucks from me again in 2008. Now you oew me 200 bucks, but pay me only 150. so 2008 ending payable would be 50 and cash paid = 150
I guess I was too fixated on this. I went out, walked around and breathed some fresh air. Now getting a bit clearer… Thx for your example, I still owe you 50 bucks Interest payable is something you owe but have not paid it so far … Back to our original question, “interest payable increased by $3M” means I paid $3M of what I owed. And this reduces my total interest expense $19M which will become $16M.
I did not quite understand what you meant … interest expense for that year was 19M. He has to pay this 19M in cash and interest payable increased by 3M meaning he has not paid in cash 3M of that 19 M … so cash paid for interest would be 16 M. The remaining 3M has been accrued in interest payable and he would pay that 3M in cash sometime in future.
I see, finally got it. Thx very much again. Positive A/P means owed sth. yet have not paid Negative A/P / (A/P) means owed sth. and paid