Question

Shyam Sunder Ltd. is a financing company. Under which of the following activity will the amount of ‘Interest paid on loan’ be shown:

• A. Investing activity
• B. Financing activity
• C. Both Financing & Operating activity
• D. Operating activity

Hint:

For financial companies, interest paid and received are classified under Operating Activities, whereas for non-financial companies, interest paid falls under Financing Activities.

Answer 1

The Correct Option is D

1. The classification of interest paid on loans differs between financing and non-financing entities.

2. For a financing company, such as Shyam Sunder Ltd., interest paid is an operating expense because earning and paying interest constitutes its primary business function. 

3. AS-3 (Cash Flow Statements) mandates the following classifications for interest paid:
 - Operating Activity for financial institutions and banks. 
- Financing Activity for non-financial corporations. 

4. Given that Shyam Sunder Ltd. operates as a financing company, the interest it pays on loans will be categorized under operating activities in its cash flow statement.

Therefore, the appropriate classification is: (D) Operating activity.