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Dear Sir,
Could you please explain Example KANE CO of BPP Text book where interest payable is added back to profit before tax and interest paid (at the same amount) is subtracted from profit before tax based on the following SPLOCI
KANE CO
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X2Sales 720
Raw materials consumed 70
Staff cost 94
Depreciation 118
Loss on disposal of non-current assets 18Operating profit 420
Interest payable 28
Profit before tax 392
Taxation 124
Profit for the year 268What I do not understand is if the interest payable is only recorded as accrual and not actually paid in the year why they have accounted for such adjustment by subtracting it from accounting profit before tax?
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If no additional data is part of this question, then i’m assuming that interest paid was exactly equal to the interest expense charged in SPLOCI.
IAS 7 has provided a detailed proforma for cash flow statement where interest expense charged in SOPL should first be added back to Profit before tax (PBT). This would give a figure equal to Operating profit (or PBIT). Then a number of non-cash items and non-operating cash flows need to be adjusted to arrive at net cash generated from operations. Actual interest paid and tax paid are then deducted to arrive at cash flow from operations.
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