Bank overdraft is a facility provided by banks to their customers to withdraw more money than their available balance in their account. However, the amount withdrawn as an overdraft is subject to interest charges and fees. In a cash flow statement, bank overdraft is treated differently based on whether it is used for operating or investing activities.

Treatment of Bank Overdraft in Operating Activities:

Bank overdraft used for operating activities is treated as a cash outflow in the cash flow statement. It is included in the operating activities section under cash outflows. The amount of bank overdraft used for operating activities is added to the net income of the company and adjusted for non-cash items to arrive at the operating cash flow.

Treatment of Bank Overdraft in Investing Activities:

Bank overdraft used for investing activities is treated as a cash inflow in the cash flow statement. It is included in the investing activities section under cash inflows. The amount of bank overdraft used for investing activities is deducted from the net income of the company and adjusted for non-cash items to arrive at the investing cash flow.

Example:

Suppose a company has a bank overdraft of $10,000. It is used for operating activities such as payment of salaries and rent. The interest charges and fees on the overdraft amount to $1,000. The company's net income is $50,000, and it has non-cash expenses of $5,000.

- If the bank overdraft is used for operating activities, then the treatment will be:

Cash Outflows:

- Bank overdraft = $10,000
- Interest charges and fees = $1,000

Adjustments:

- Non-cash expenses = $5,000

Operating Cash Flow:

- Net income + Adjustments - Cash outflows = $50,000 + $5,000 - $11,000 = $44,000

- If the bank overdraft is used for investing activities, then the treatment will be:

Cash Inflows:

- Bank overdraft = $10,000

Adjustments:

- Non-cash expenses = $5,000

Investing Cash Flow:

- Net income + Adjustments + Cash inflows = $50,000 + $5,000 + $10,000 = $65,000

Conclusion:

In conclusion, the treatment of bank overdraft in a cash flow statement depends on whether it is used for operating or investing activities. If it is used for operating activities, it is treated as a cash outflow, and if it is used for investing activities, it is treated as a cash inflow.

Bank overdraft is added as cash flow in financing activities while interest paid on it is added in operating activities and cash outflow in financing activities