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Treatment of interest payment in calculation of funds from operations

SIR
In cash flow statement we add back interest on debentures and interest on loans to find out cash flow from operating activities. But we don't add back interest on debentures and interest on loans to find out fund from operations. Why sir

my next doubt
In which all situations do we not take interest on debentures and interest on loans In cash flow to find out cash from operating activities in CASH FLOW

asked Sep 14, 2016 in Cash Flow Statement and Fund Flow Statement by ABRAHAM PETER (4 points) 665 views

1 Answer

0 votes
You have raised a very valid question, why interest paid is not added back to Profit to find out Funds from operations.  In my opinion interest paid is a non-operating expense for a non-financing business, hence it should be added to Profit to find out Funds From Operations.  Payment of Interest should be shown as an application of Funds.  In case of Cash Flow Statement interest paid is treated as Financial Expense, hence it is added back to profit and payment shown as cash outflow on account of financial expenses.

In case of banks and other companies dealing in  finance, payment of interest is treated as an operating expense, hence not added back to profit to find out cash from operations.  For a venture capitalist received of divided and interest is operating income and it is not deducted from profit to find out cash from operating activities.  In nut shell one should keep in mind the nature of the business before classifying interest paid and received as operating or non-operating expenses and incomes.
answered Sep 20, 2016 by jbsclasses (3,971 points)
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