Cash flow items treatment

“1)Interest expense
Why we add back a interest expense ,is not it a cash flow when company pay the interest on a loan?”

Interest expense is an accruals based figure and we’re preparing a statement of CASH flows So we add back the accruals based figure and replace it with the cash interest actually paid during the year

“2)Investment income
Why we deduct the investment income?Income means more cash coming into the business right?”

Same rationale as the interest expense, investment income is an accruals based figure. Think about a parent receiving a dividend from an associate (just think about it … don’t get panicky about it because group cash flows are not in your syllabus!)

The consolidated statement profit or loss includes the investor’s share of the associates profit after tax but that figure is not the same as the dividend received from the associate

“3) What is the difference between interest expense and interest paid?Interest expense is added back but interest paid is deducted. Are not both the same thing?”

Why do you think we have accruals and prepayments? Imagine that you have paid three electricity bills in your first year of business and the invoice for the fourth quarter is not received by you until after your accounting year end. What are you going to do? Just include the amount for the 3 invoices that you have paid? Or are you going to add an estimate of the fourth quarter’s invoice to arrive at the profit or loss expense for the year?

Now then … tell me if you still believe that the expense in the statement of profit or loss is the same as the amount that you have actually paid!

OK?