Cash Flow From Operations

CFA Level I FRA
#1

Net Income = 100

Increase In Inventory = 125

Decrease in Receivables = 75

Increase In Payables = 25

Interest Paid = 40

Dividends Paid = 10

Interest Received = 15

Sale of Common Stock = 325

Retirement of Debt = 250

Purchase of Equipment = 110

What is the company’s cash flow from operations under US GAAP?

The solution calculates as follows:

Net Income - Increase In Inventory + Decrease In Receivables + Increase In Payables = 75

However, I am aware that interest paid is classified as operating under US GAAP. Based on this, why is interest paid not deducted from our net income?

#2

Interest expense is a nonoperating expense, but interest paid is an operating cash (out)flow. It’s already been removed from net income, so you don’t need to make an adjustment for CFO.

(Note: if interest expense includes any amortization of bond premia/discounts, you’d need to adjust for those, as they’re noncash. However, that won’t show up on a Level I CFO question.)