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CMA Intermediate · Corporate Accounting and Auditing · Cash Flow Statement

Sundaram Machines Ltd acquired a machine on deferred payment terms. An instalment paid during the year includes both interest and the principal (loan) element. How does AS 3 require this instalment to be classified?

AS 3 says a single transaction can have differently classified cash flows. For an instalment on a deferred-payment fixed asset, the interest element is shown under financing activities, while the loan element is shown under investing activities.

  1. AEntire instalment under investing activities
  2. BInterest under financing activities and loan element under investing activitiesCorrect
  3. CInterest under operating activities and loan element under financing activities
  4. DEntire instalment under financing activities

Explanation

AS 3 notes that when an instalment on a fixed asset bought on deferred payment includes interest and loan, the interest element is classified under financing activities and the loan element under investing activities. Treating the entire instalment in one category ignores this split.

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