In case of a financial enterprise, interest paid is classified under which activity while preparing Cash Flow Statement.

Operating activity

The correct answer is Option (1) → Operating activity.

Interest paid is classified under operating activity while preparing Cash Flow Statement.

An enterprise may hold securities and loans for dealing or for trading purposes. In either case they represent Inventory specifically held for resale. Therefore, cash flows arising from the purchase and sale of dealing or trading securities are classified as operating activities. Similarly, cash advances and loans made by financial enterprises are usually classified as operating activities since they relate to main activity of that enterprise. In case of a financial enterprise (whose main business is lending and borrowing), interest paid, interest received and dividend received are classified as operating activities while dividend paid is a financing activity.