Question

Interest received by a finance company is classified under which activity in Cash Flow Statement?

• A. Operating Activity
• B. Investing Activity
• C. Financing Activity
• D. Extraordinary Activity

Hint:

For financial enterprises: \[ \text{Interest received} \rightarrow \text{Operating Activity} \]

Answer 1

The Correct Option is A

Step 1: Understanding the Concept:
A Cash Flow Statement tracks the inflows and outflows of liquid cash classified across three primary enterprise functions: Operating, Investing, and Financing activities. When categorizing a cash transaction, you must analyze the core business nature of the reporting enterprise. A transaction that is considered an investment for a regular manufacturing firm might be considered an everyday core trade activity for a banking or financial institution.
Step 2: Detailed Explanation:
Let's look at the operational distinction between different types of companies: 1. For a Non-Finance Company (e.g., Manufacturing/Retail): The principal revenue-producing activity is selling goods or rendering physical services. Lending money or purchasing external shares is a side-activity to utilize excess cash. Therefore, for these firms, interest received on deposits/loans is categorized under Investing Activities. 2. For a Finance Company (e.g., Banks/NBFCs): The core business model revolves entirely around dealing in monetary assets. Their principal operations consist of accepting deposits, raising capital, granting commercial loans, and investing in market securities. Because a finance company earns its core revenue from the interest spread on these loans and credit advances, the inflow of Interest Received represents cash generated from its principal, everyday business transactions. Hence, it falls strictly under Operating Activities. This corresponds to option (A).
Step 3: Final Answer:
Interest received by a finance company is classified under Operating Activity.