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- February 28, 2017 at 1:04 am #374659
When preparing a statement of cash flows why we we subtract the investment income and add back the interest expense?
February 28, 2017 at 6:02 am #374671Because both of these are non-cash items
They are both accruals based and we are preparing a statement of CASH flows
So we need to deduct the figure for investment income – this has been credited in arriving at profit before taxation and it’s non-cash so we need to deduct it
Similarly, the interest expense is the finance cost for the year on an accruals basis (a non-cash basis) and has been deducted in arriving at profit before taxtaion so we need to add it back
We then compute the aactual amount of cash received by way of investment income and show that as an inflow within the investing activities section of the statement of cash flow
Similarly we compute the actual amount of cash paid in respect of interest and deduct that computed amount within the operating activities section of the statement of cash flows
It may be that, in either or both of these figures, the cash received is exactly the same as the accruals based figure
In this case we have to deduct the investment income figure from the profit before interest and taxation and add that same figure in as a positive flow within investing activities
Similarly we need to add back the interest expense to profit before interest and taxation within operating activities and then deduct it – again, within operating activities
OK?
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