#54 on CFAI Mock Morning

For the most recent year a manufacturing company reports the following items on their income statement: Interest Expense $62,500 Loss on disposal of fixed assets $50,000 Realized gain on sale of avail-for-sale securities $17,750 Which of these items is classified as an operating item in the company’s income statement? A. Interest Expense B. Loss on disposal of fixed assets C. Realized gain on sale of avail-for-sale securities The answer they give is B, but I thought it would be A. Isn’t interest expense always an operating activity under US GAAP, and any PPE is investing? Please clarify. Thanks.

interest expense under GAAP is always included in Cash Flow from Operations… it’s different from being included in the “normal” operating activities of the company… one thing is classification of cash flows and another is to classify if is operating or non-operating activity.

Gain or loss from the sale of a PPE is always a Operating activity. It has to be decducted or added back to the NI. The proceeds from the transaction is an investing activity.

billy Interest expense is an operating item for finance companies, but not manufacturing companies. So, one wouldn’t subtract out this interest expense to arrive at operating income. G/L from sale of an asset is an operating activity under the “unusual or infrequent but not both” umbrella.

Maybe I’m confusing operating activities with Cash Flow from Operations. Because interest expense ALWAYS falls under CFO, assuming US GAAP, right?

Yep, it’s an intentionally confusing point that I suspect will be on the exam…

Operating activities are subtracted from Sales to get Operating Income, EBIT. This is all on the Income Statement. You’re thinking of the Cash Flow Statement, in which interest received and paid are both CFO under GAAP. For the sake of our test, know that under IFRS interest paid can be CFO or CFF, while interest received can be CFO or CFI.

mcaval, Thanks. That is an extremely cogent explanation of the differences. Much appreciated.