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Interest cost in cash flow statement.

ABHINAV SHUKLA (CA-Final) (203 Points)

31 May 2016

Hai. Everyone Pl. Guide me regarding treatment of Interest cost in Cash Flow Statement. my Question is Why interest cost (Expense) is Added back in PAT (in cash flow from Operating Activity) and considered in Financing Activity. because Interest cost is in Expense which is directly related with operation of Business, so why it is considered in financing activity instead of considering in Operating Activity. Pl. Guide, and explain reason behind this. Thanks

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CA Rohit Jain (Practice) (1865 Points)
Replied 31 May 2016

Dear Abhinav,

Eventhough loans are obtained by various organisations to support its operation, but nature of the transaction remains financial in nature because whether you are continuing operations or not, you have to pay interest on the loans taken. So in the absense of direct nexus between the interest cost and the operations it has been suggested by AS- 3 to treat interest cost as part of financial activity. However if the entity is engaged in the business of providing finance and loans, then the interest costs become part of the operating activity due to direct nexus between the operations and the interest.

I hope this will suffice.