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Hi,
I’m a bit confused of when to add back interest to Profit Before Tax in Cashflow statement, as sometimes I see interest are added back to PBT and deducted from Interest Paid, and sometimes interest ONLY is deducted after Cash generated from Operations.
Could you pls help explain? Thanks!
Your start point is pbt. Pbt is stated ( normally ) AFTER the interest charge for the year. But the interest charge is an accruals-based figure and we want to have a cash-based statement.
So, as a general principle, start with pbt, add back the finance charge shown in the income statement, calculate the interest actually PAID and deduct that as an outflow in the “Operating activities” section.
There was one question where the draft accounts had not been adjusted for the accruals-based interest figure. In that situation, we had to take the draft pre-interest profit and deduct from that figure the amount of the interest. that brought us to profit before tax – ie, the start point for the cash flow.
Immediately, we than had to add back the interest figure we had deducted moments earlier!
And then, still within Operating Activities, we had to deduct the same figure as “Interest paid” !!!!!
Good luck on Wednesday
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