Interest received by a Banking company is covered under which of the following activities in the cash flow statement?

Correct option is A

The correct answer is (1) Operating activities because for a banking company, interest received is a part of its core business operations. The primary activity of a banking company involves accepting deposits and lending funds, and interest earned on loans and advances is considered part of its operating revenue.

• Operating Activities (Correct): For banks, cash flows from operations include income from core activities such as interest earned on loans, advances, and investments.
• Financing Activities: These involve cash flows related to raising or repaying capital, such as issuing shares or paying dividends. Interest received does not fall under this category for banking companies.
• Investing Activities: These include cash flows related to the purchase or sale of long-term assets or investments, not related to operational interest income.
• Operating or Financing Activities: This is not applicable here since interest received by banks is strictly part of their operating activities.

Information Booster

Cash Flow Statement in Banking Companies:
In the context of a bank, the cash flow statement is governed by Accounting Standard (AS) 3. It categorizes cash flows into:

• Operating Activities: Include activities related to the core banking business, such as interest received, fees, and commissions.
• Investing Activities: Include investment in or sale of long-term securities and fixed assets.
• Financing Activities: Include activities like raising capital, issuing bonds, or paying dividends.

Since earning interest is central to a bank's operations, it is classified as an operating activity, unlike for non-financial companies, where it may fall under investing activities.

Additional Knowledge

• Interest Received for Non-Financial Companies: It is categorized under investing activities because it is not a primary operation but an ancillary income from investments.
• Interest Paid for Banking Companies: It is also classified under operating activities, as paying interest to depositors is a routine operational expense.

By clearly understanding this classification, one can better analyze cash flow statements and assess the financial health of banking institutions.