Interest Expenses on Statement of Cash Flow
Interest Expense is the cost that company needs to spend when taking a loan from the bank or any other creditors. In the business operation, we may use either loan or equity to make new investments. We can request loans or issuing debt security into the market such as bonds. When we receive loans from banks, financial institutes, or other creditors, we need to pay interest for them.
Interest expense is the expense line item that will appear on the income statement. It will deduct the profit during the period regardless of the cash flow or not.
Interest paid will appear in the statement of cash flow when the cash is actually paid to the creditors. Which activities should we classify the interest paid on the statement of cash flow?
Statement of Cash Flow
Cash flow is the statement of a company’s cash movement within an accounting period. It summary the source of cash inflow and how the cash is spent. Cash flow is separated into three activities:
- Operating
- Investing
- Financing
Interest Paid on Statement of Cash Flow
Interest paid is a part of operating activities on the statement of cash flow. Interest paid is the amount of cash that company paid to the creditor. It may be higher or lower than the interest expense on the balance sheet.
Only interest paid has an effect on the cash movement, not interest expense. Cash paid on interest will be present under the “cash flow from operating activities”.
Different cash paid on the loan which is presented under “ cash flow from financing activities”.
Interest Paid on Statement of Cash Flow Example
Base on the financial statement, ABC company has paid $ 13,000 in interest to the bank and another $50,000 on the loan principle. Please prepare a statement of cash flow regarding both transactions.
Below is the movement of interest payable:
| Account | Amount |
| Interest Payable at Beginning | 10,000 |
| Interest Expense | 20,000 |
| Interest Paid | (13,000) |
| Interest Payable at the End | 17,000 |
| Partial Statement of Cash Flow | |
| Operating Activities | |
| Net Income | XXXX |
| Depreciation | XXXX |
| Interest Expense | 20,000 |
| Change in working capital: | |
| – Decrease in AR | XXXX |
| – Increase in Inventory | XXXX |
| – Increase in Interest Payable | 7,000 *** |
| Financing Activities: | |
| Repayment on Loan | (50,000) |
| Cash flow from issuing bonds | XXXX |
*** Note: We already know that the interest paid is $ 13,000 but why we only see $ 7,000 appear on the cash flow statement.
- Interest payable increase from $ 10,000 to $ 17,000 at the end of the year.
- The Net Income balance already deducts $ 20,000 of interest expense.
- The increase of interest payable $ 7,000 is considered as cash inflow.
- So the net impact is negative $ 13,000 (-20,000 + 7,000) which is equal to interest paid.