Question

while preparing the cash flow statement Accountant of Infratech Limited a manufacturing company showed interest on long term borrowings as operating activity was he correct in doing so give reason in support of your answer

Answer 1

For cash flow statement, three types of activities are shown:

1. Operating activities: main business activities of the business, e.g. trading or manufacturing or service provisioning.

2. Investing activities: all about investments done, either in fixed assets or investment of excess money in outside business, e.g. investment in shares.

3. Financing activities: all things related to the capital of the entity, either raising of capital or its repayment. And also cost of capital in terms of interest on loans and dividend on share capital.

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Here in the question, it's manufacturing company whose main business is manufacturing of things and selling them. And long term borrowings is a part of capital, therefore, interest paid on such borrowings is shown under financing activities.

However, there is a different treatment if it would be a finance company. A finance company whose main business is of raising and lending money. In those companies, interest received on lent money is revenue source, hence it's main cost: interest paid on raised money is also shown under operating activities. Still, proceeds from long-term borrowings is shown under financing activities.

So, the treatment done by Infratech Ltd. is not correct.