Question
What will be the impact on Return on Equity (RoE) if
cash is paid to the creditors?Solution
Return on Equity (RoE) = Net Profit / average networth of the company As per accrual accounting, the transactions are recorded in the income statement based on when they occur and not based on the actual cash movement. As such, the net profit is not affected /changed when actual payment is made to the creditors. Thus the RoE remains unaffected by the above transaction.
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