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To calculate the cash flow in repayment of finance lease, implicit rate interest is deducted from initial deposit and annual payment of finance lease. But i didnt understand why we cant just add the annual payment and initial deposit since that is the real outflow?Why do we have to deduct any amount? Can u pls help me to sort it out.
The amount by which the finance lease creditor is financing our activities is restricted to the capital element of the lease
The finance lease interest is an operating expense and should be included within the line “Interest paid” used in arriving at “Net cash flow from operating activities”
If we include the interest element within “Interest paid” within operating activities and we include the capital amount paid within “Amounts paid to finance lease creditors” within financing activities, we shall have included the full amount of the cash paid … but now it is properly sub-divided into the operating and the financing elements
OK?
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