Interest paid on debentures by a manufacturing company would be

The correct answer is Option (1) → Added in Operating activities and subtracted from Financing activities

For a manufacturing (non-financial) company, interest paid on debentures is a cost of raising funds, so AS-3 classifies it under financing activities. Under the indirect method the operating cash flow starts from net profit, which has already been reduced by this interest; the interest is therefore added back in operating activities and shown as an outflow (subtracted) in financing activities.

• Option (2) Added in Investing activities and subtracted from Operating activities — Incorrect. Interest paid has nothing to do with buying or selling long-term assets, and it is added back, not subtracted, in operating activities.

• Option (3) Added in Financing activities and subtracted from Investing activities — Incorrect. Interest paid is an outflow in financing activities, so it is subtracted there, and it does not touch investing activities.

• Option (4) Added in Cash and Cash equivalent — Incorrect. Paying interest reduces cash; it is never added to cash and cash equivalents.