Accountancy Part BCash Flow Statement

Interest paid on long term borrowings is presented as an addition to…

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

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Non-operating item

Under the indirect method, cash flow from operating activities starts from net profit before tax. Interest on long-term borrowings has been charged in arriving at that profit, but it belongs to financing activities, not to operations. Being a non-operating item, it is added back to the profit and shown as an outflow under financing activities.

Option (1) Non Cash item — Incorrect. Interest paid is an actual cash payment; non-cash items are things like depreciation.

Option (2) Operating item — Incorrect. An operating item would stay in the operating profit, not be added back.

Option (3) Non-operating item — Correct.

Option (4) Cash Expense — Incorrect. Being a cash expense is not the reason for the add-back; the reason is that it is not an operating item.

NCERT (2026-27 edition):
Indirect Method – “… However, Statement of Profit and Loss is prepared on 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.”