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Dear Tutor,
Kindly explain why finance cost is added back to net profit under “cash flow from operating activities” and why investment income is deducted from the same?
Are they included elsewhere in the statement of cash flow?
Thanks,
Haider
Hi,
Yes, they’re included elsewhere in the SCF. Finance costs help us calculate the interest paid and investment income the dividend received.
They are adjusted as you mention as we are looking at the company’s operations and have started with profits before tax. To get back to the profit from operations from PBT we need to add back the finance costs and deduct the investment income.
Thanks
Thanks for the quick response. Just a follow up. Why is the ‘interest paid’ included in the ‘cash flow from operating income’ to give us Net cash generated from operations. Shouldn’t it be included in the ‘cash flow from financing activities’ section. However, looking at the template on page 17 of the FR Notes, it’s not mentioned in the financing activity section and only mentioned in the operating activities section.
Kindly clarify,
Thanks.
Hi,
Yes, you would expect it in the investing activities section but it is a mandatory payment the company has to make. The usefulness of the statement of cash flows will be better suited if we see that this payment is covered by the cash flows from the day-to-day operations, hence its inclusion in cash flows from operations.
Thanks
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