When adjusting the income statement: When recalculating EBIT, why do you add back in the interest expense of 15,300? The book says “EBIT increases because the discount(implicit cost) on the sale of the receivables is taken as an operating loss.”
Not sure but Ill take a shot at it. EBIT= earnings “before interest” and taxes. Therefore you want to add back interest
- when prepare the f/s, the discount(implicit cost) on the sale of the receivables is taken as an operating loss, deducted from EBIT, thus EBIT is lower in f/s. 2. when analysing the sale of receivables with recourse, the sale is treated a collateralized borrowing. EBIT is recalculated by adding the discount, i.e. borrowing interest cost back . thus EBIT is increased. meanwhile, the interest expense is also added the discount. 3. the recalculated EBIT and interest expense are superior to analyse company.