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Question

What will be the impact on Return on Equity (RoE) if cash is paid to the creditors?

A RoE will decrease Correct Answer Incorrect Answer
B RoE will increase Correct Answer Incorrect Answer
C RoE will be unaffected Correct Answer Incorrect Answer
D RoE will become negative Correct Answer Incorrect Answer
E Any of the above Correct Answer Incorrect Answer

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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