Cash Flow From Operations

[michaelgrogan]

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?

 

[S2000magician]

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.)