Why is interest added back to profit before tax when calculating the rate of return on total assets?
A) To reflect the fact that the efficient use of resources should be examined independently from the method of financing.
B) Because it must be paid regardless of profits.
C) Because interest rates are variable over time.
D) To indicate to lenders that some risk is involved.

Question

Quizplus · Accepted Answer

The efficient use of resources should be examined independently from the method of financing, as interest payments may vary depending on the financing method. Therefore, adding back interest to profit before tax provides a more accurate evaluation of the rate of return on total assets.

Why Is Interest Added Back to Profit Before Tax When