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Question

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

A Return on Equity will be decreased Correct Answer Incorrect Answer
B Return on Equity will be increased Correct Answer Incorrect Answer
C Return on Equity will be unaffected Correct Answer Incorrect Answer
D Not determinable Correct Answer Incorrect Answer
E None of the above Correct Answer Incorrect Answer

Solution

Return on Equity (RoE) = Net Profit / Average Net Worth 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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