- This topic has 7 replies, 3 voices, and was last updated 4 years ago by
.
- Posts
Hi Chris,
Why is interest paid included in ‘cash flow from operations’ on the cash flow statement and not under ‘cash flow from financing activities’.
In essence long term debt is just another form of long term financing just like share capital.
Question arises if we present dividend paid under financing activity why not interest paid treated similarly?
Thanks.
Hi,
It does look odd, doesn’t it, as you would expect to see if under financing activities as it related directly to the company debt.
It appears where it does as it is a mandatory payment, similar to that of the payment of tax. The user of the financial statements will then be able to see if the cash from operations is then sufficient enough to pay these mandatory payments. If we can’t pay the tax authorities or the banks then we’re in trouble!
Thanks
Fair enough if we look from that perspective of “mandatory payment”.
But how I see, real purpose of SOCF is to identify sources and application of cash by entity during f.year and ultimate reconciliation of opening and closing cash balances.
Payment of Interest does not obligate from operational activities but from borrowing of funds. It doesn’t matter if I do intended business I am still suppose to make payment.For taxation we still can agree, we are paying taxes for profits generated out of operational activities.
What do you personally think?It doesn’t come from operational activities but if the operational activities don’t cover the interest payments then the company will be in trouble. It is therefore more relevant to show this than the actual origin of the cash flow.
Thanks
Thanks for your comment.
Yeah! It is more relevant for users of FS to show where it is placed.
Ideally operational cash flow should be large enough to at least cover up both taxes and finance cost!I query to not belittle anyone or pin point mistakes but to have my logics clear.
Thanks again for input, it matters.Hi Deviant. I had the same confusion. However upon reading IAS 7 it became clear to me. IAS 7 says that interests and dividends paid/received can be included in ANY of the 3 sections, as long as the entity is consistent in its practice. So the standard is flexible when it comes to dividends and interests paid and received.
In one sense, interest paid could come under financing as it is the cost of the finance. However, IAS 7 clearly states that the financing section is for cash flows that ALTER THE CAPITAL STRUCTURE OF THE ENTITY, which obviously paying interest doesn’t. Therefore it makes sense to include it in the operating section instead.
However, by this same argument, I believe dividends paid should also be included in the operating section and not the financing section. Only Shares sold/bought back and loan taken/paid back should form the financing section.
Hi Haider,
Thanks for your comment and highlighting the fact that Standard is flexible with treatment of Interest charges. Appreciate that!
Though showing under operational activities do make sense. An Entity should earn enough cash through its operating activities (which are also primary source revenue generation) to make for mandatory payments as clarified by Chris earlier.
Thanks Again!
- You must be logged in to reply to this topic.