Hi,
I am struggling to understand why we do not deduct Interest Payment from EBIT when we find the Operating Income after taxes.
I think of a normal Income Statement like this:
EBIT
= EBT
= Net Income
But when we are calculating After Tax Operating CF, we skip the Interest Rate Payment, why?
EBIT
= Operating Income after Taxes.
Why do we not deduct the interest rate payment before we calculate the taxes? Or do I have it wrong?
Thanks a lot for the help.
We do not deduct interest because they are not contained in EBIT (Earnings before Interest and Taxes). At least, you arranged correctly above. Interest are usually non-operating income/expenses than financial one, unless the object is financial institution.
In short: interest is not an operating expense.
(But under US GAAP, cash interest paid is an operating cash (out)flow. Go figure.)
Thanks for the reply both of you.
What I still don’t understand is why we can have two different amounts in taxes? One based on EBT ( when calculating NI) and one based on EBIT ( When calculating CFO). Why is the tax amount based on EBIT when I look at CFO ( Operating Cash Flow).
For the exams, will I be fine if I do
CFO:
EBIT
= CFO
?
Also, what if I had a company reporting Interest as an Operating expense.
would it be like this?
ebit
depreciation
interest
= CFO
or like this
Ebit
= Ebt
depreciation
interest paid
= CFO
Thanks for the help, much appreciated.
I came across an example where the statement of cash flows contained operating cash flow as : Net income + depreciation. 1) ( No interest added back means US GAAP assumed??)
This is a question in Corp fin for calculating economic income. In the answer , instead of taking the operating cash flow number directly from the statement of cash flows, they have calculated it from EBIT.