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1. What is the main problem with calculating interest received in a financial model?
It is usually immaterial
Interest is calculated on the average cash balance, which typically is a weighted average of opening and closing cash balances. The problem is, interest received forms part of the closing cash balance which gives rise to a circular reference
It distracts the end user from interest paid, which is the mandatory servicing of debt. If this is not focused on, lenders may foreclose on the loan thus threatening the financial viability of the business
2. Calculating interest can be solved by the solution to two simultaneous equations. In the formula, x represents the proportion into the period that the non-interest cash movements are assumed to occur. On this basis, what does x = 75% mean?
The average cash balance is calculated by taking 75% of the opening balance and 25% of the closing balance
The average cash balance is calculated by taking 25% of the opening balance and 75% of the closing balance
Only 75% of all non-interest sourced cash should be included
3. In the Income Statement, which line item should most likely not include Interest Income?
Costs Of Goods Sold
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