This often confuse students who are studying Statement of Cash Flows that what is the correct way of disclosing or presenting interest paid or received and dividends paid or received during the period. Many students even after learning how to prepare a cash flow statement remain unclear that under what activity should we show interest paid/received and dividends paid/received. Show International Accounting Standard (IAS) 7 Statement of Cash Flows in para 31 requires: Cash flows from interest and dividends received and paid shall each be disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities. From the above statement we can understand the following:
Important IAS 7 Para 33 states that if the entity under consideration is a financial institution then interest paid and interest and dividends received are usually classified as operating activities. That means in case of statement of cash flows relating to financial institutions things are clear. Its just the case of entities other than financial institutions where accountants don’t agree on a single treatment. Read on to understand more. The reason that why we do not have clear cut basis for classifying such items in statement of cash flows is that accountants and standard setters have differing opinions. For example:
From the above discussion, we can see that even IAS 7 is not giving us a single and conclusive instruction on classification of interest and dividends paid and received. Therefore, in my opinion it will be good if we settle ourselves with a mix of conceptual understanding and industrial practice. Following are the suggestions in this regard: Interest paid Dividends paid
Dividends paid on first type of shares is basically appropriation of profits and are not considered in profit and loss determination therefore, they are most commonly disclosed under financing activity. Dividends paid on second type of shares is basically an expense and is same as interest expense which also means that such dividends are considered in profit and loss determination therefore, it would be good that if the disclosed with interest paid under operating activities. However, common practice is that any dividends paid irrespective of type of shares are disclosed under financing activities. Interest and Dividends received The common practice for interest and dividends received is to disclose them under investing activities heading of statement of cash flows. Conclusion I must emphasize again that above suggestions are just for students’ understanding so that they can perform with confidence in the exams. However, in real life accountants and those responsible for preparing financial statements have total freedom to decide how a certain item should be disclosed and it is the responsibility of such accountants and responsible party to ensure that such presentation should be selected that is most appropriate i.e. that results in more relevant and reliable financial statements. Following summary of options available for different items might help even further: Previous articleIs audit an attestation engagement or direct reporting engagement? Next articleHow a loan repayment is disclosed in statement of cash flows? Hasaan Fazal Teaching professional business subjects to the students of FIA, ACCA, CIMA, CA etc. He also found ACCA LIVE which is Pakistan's first portal to provide online classes and distance learning solutions to FIA/ACCA students. At PakAccountants.com he is busy making study material for different qualifications. Beside writing articles he answers questions asked using ASK TUTOR! Is interest income an operating cash flow?Paragraph 33 of IAS 7 states that interest paid and interest and dividends received are normally classified as operating cash flows by a financial institution.
Is interest income a financing activity?Interest and dividends
classified as operating activities. Dividends received are classified as operating activities. Dividends paid are classified as financing activities. Interest and dividends received or paid are classified in a consistent manner as either operating, investing or financing cash activities.
How is interest treated in cash flow statement?interest paid and interest received should be treated as Cash Flows from Operating Activities. flows from interest paid should be treated as Cash Flows from Financing Activities while interest received should be treated as Cash Flows from Investing Activities.
Why is interest income negative in cash flow statement?Interest Expense on the Income Statement
Since the net profit or loss reported on your company's cash flow statement already accounts for the interest expenses your business paid during a given period, the amount paid will not appear as a separate line item on your company's cash flow statement.
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