Financial Accounting · Statement of cash flows (excluding partnerships)

How to Calculate Interest Paid and Tax Paid in a Cash Flow

Updated 11 October 2026 · Fact-checked

Interest paid and income tax paid are cash amounts, not the profit or loss charge. Use a T-account: opening liability plus the charge for the year, minus closing liability, gives cash paid. Interest paid is usually shown in operating or financing activities under IAS 7; tax paid is normally operating.

Understand Interest and Tax Paid Workings

The statement of cash flows shows cash that moved, not expenses that were recorded. The statement of profit or loss shows the finance cost and tax charge for the year on an accruals basis. The cash actually paid can differ, because some of the cost may be unpaid at the year end, and last year's unpaid amounts may be settled this year.

That is why you need a working. The statement of financial position gives you the liability at the start and end of the year. The statement of profit or loss gives you the charge. The cash paid is the missing figure that makes the account balance.

For income tax, the liability is income tax payable in current liabilities. The charge is the current tax in profit or loss. If the charge includes a transfer to deferred tax, you must handle that separately, because deferred tax is not a cash payment.

For interest, the liability is accrued interest (often inside other payables). The charge is the finance cost. Under IAS 7, interest paid may be classified as operating or financing activities, as long as the entity applies the choice consistently. Tax paid is normally classified as operating, unless it can be linked to an investing or financing activity. In ACCA FA questions, follow the instruction given or the layout the question uses.

Watch one trap. If you start from profit before tax in the cash generated from operations, finance costs have already been deducted. You add them back there, then deduct the interest actually paid in its own line. This avoids counting interest twice.

Key formulas to remember

Tax paid (T-account): Tax paid = Opening tax payable + Tax charge for the year − Closing tax payable; Use the current tax charge only. Opening and closing balances are credit balances (liabilities).
Tax paid with deferred tax: Tax paid = Opening current tax + Opening deferred tax + Total tax charge − Closing current tax − Closing deferred tax; Use this when the question gives one combined tax liability. It treats both parts together.
Interest paid (T-account): Interest paid = Opening accrued interest + Finance cost for the year − Closing accrued interest; If there is an interest prepayment or receivable, reverse the sign of that balance.
Add-back in operations: Cash generated from operations starts from profit before tax, then adds back finance costs; Interest paid then appears on its own line, so the cost is counted once.
Classification rule: Interest paid: operating or financing (consistent choice). Tax paid: normally operating.; Follow the question's instruction if it states where to show interest.

How to solve Interest and Tax Paid Workings questions

Use the same four-part routine for every interest or tax question. It works whether the liability is a payable or a receivable.

1Find the opening and closing balances on the two statements of financial position. Label them as liabilities or assets.
2Find the charge for the year in the statement of profit or loss, and note whether it is current tax, deferred tax or finance cost.
3Draw a T-account. Put the opening balance and the charge on the credit side, and the closing balance on the debit side as the balancing figure line.
4Find the balancing figure. This is the cash paid. Check it is positive and smaller than a sensible total.
5Put the figure in the correct section of the cash flow, shown as an outflow in brackets.
6Check the add-back: finance costs are added back in cash generated from operations if you started from profit before tax.

Quickest way: Opening plus charge minus closing

When to use it: Use it for number-entry or multiple-choice questions where you have under two minutes per question and both balances are given.

Write: opening + charge − closing.
If the balance is an asset (overpaid tax or prepaid interest), reverse its sign.
If deferred tax is mentioned, add both opening balances and both closing balances first.
Check that the answer is plausible: it should usually be near the charge.

Common mistakes in Interest and Tax Paid Workings

Using the profit or loss charge as the cash paid
The charge is the easiest figure to see, so students copy it straight across.
Fix: Always do the T-account. The charge is only one side of the working.
Subtracting the opening balance and adding the closing balance
Students mix up which balance is the liability brought forward.
Fix: Remember: opening is added, closing is deducted. You pay off last year's debt and keep this year's unpaid amount.
Including deferred tax in the cash paid when only current tax is a cash flow
The tax charge in profit or loss is often one total figure.
Fix: Separate the deferred tax movement first, or use the combined formula with both opening and closing deferred tax.
Deducting interest twice
Students start from profit before tax, which is already after finance costs, and then deduct interest paid without adding finance costs back.
Fix: Add finance costs back in the operating working, then deduct interest paid once in its own line.
Showing the interest or tax inflow as a positive number
The working gives a positive result, so students forget it is an outflow.
Fix: Show cash paid in brackets in the statement of cash flows.
Ignoring accrued interest and using only the loan balance
Students think interest is just the rate times the loan.
Fix: Use the finance cost and the accrued interest balances, not a rate calculation, unless the question tells you to.

Worked examples

Example 1

A company's statement of financial position shows income tax payable of $42,000 at the start of the year and $50,000 at the end. The statement of profit or loss shows an income tax charge of $68,000. There is no deferred tax. Calculate the tax paid.

Show the solution

Opening income tax payable: $42,000 (liability).
Add the charge for the year: $42,000 + $68,000 = $110,000.
Deduct the closing payable: $110,000 − $50,000 = $60,000.

Answer: Tax paid is $60,000, shown as an outflow of ($60,000) in operating activities.

Example 2

Profit before tax is $300,000 after finance costs of $24,000. Accrued interest was $6,000 at the start and $9,000 at the end. Calculate interest paid and state the add-back in operations.

Show the solution

Opening accrued interest: $6,000.
Add the finance cost: $6,000 + $24,000 = $30,000.
Deduct the closing accrued interest: $30,000 − $9,000 = $21,000.
In cash generated from operations, add back the finance cost of $24,000 to profit before tax.

Answer: Interest paid is $21,000, shown as an outflow in operating or financing activities depending on the policy or instruction. The add-back in operations is $24,000.

Exam tips

Read each balance carefully and label it liability or asset before you calculate.
In multiple-choice questions, wrong options are usually the charge itself or the result of reversing opening and closing. Do the working rather than guessing.
In a full cash flow question, follow the question's instruction on where to show interest. If there is none, choose one section and stay consistent.
If deferred tax appears, check whether the question wants only current tax or the combined liability.
Show the T-account in your rough working. It makes errors easy to spot.

Practice questions from Statement of cash flows (excluding partnerships)

Interest and Tax Paid Workings: frequently asked questions

How do I calculate tax paid in a cash flow statement?

Take the opening income tax payable, add the tax charge from profit or loss, and deduct the closing income tax payable. The result is the cash paid. If deferred tax is included, adjust for its movement as well.

Where does IAS 7 say interest paid should be shown?

IAS 7 allows interest paid to be shown as an operating or a financing cash flow, as long as the choice is applied consistently. In ACCA FA questions, follow any instruction given in the question.

Do I add back interest in cash generated from operations?

Yes, if you start from profit before tax, because finance costs were deducted to reach that profit. You then show interest paid separately as a cash outflow.

Is tax paid an operating cash flow?

Normally yes. IAS 7 says taxes on income are usually classified as operating activities unless they can be specifically linked to investing or financing activities.