Interest paid on long-term borrowings is presented as an addition to Net Profit before tax, being a..........

Non-operating item

Interest paid on long-term borrowings is a Non-operating item. Indirect method of ascertaining cash flow from operating activities begins with the amount of net profit/loss. This is so because the statement of profit and loss incorporates the effects of all operating activities of an enterprise. However, Statement of Profit and Loss is prepared on an accrual basis (and not on cash basis). Moreover, it also includes certain non-operating items such as interest paid, profit/loss on sale of fixed assets, etc.) and non-cash items (such as depreciation, goodwill written-off, divident declared, etc. Therefore, it becomes necessary to adjust the amount of net profit/loss as shown by Statement of Profit and Loss for arriving at cash flows from operating activities.