Question

Interest Expense is treated as an operating activity item in the Statement of Cash Flows while it is listed as a financing activity item in the Income Statement. List the reasons why interest should be an operating or financing activity item and recommend your position on how interest should be listed (operating or financing).

Answer 1

In statement of cash flows, cash flow from operating activites is calculated using net income. Net income already takes into account interest expense, hence interest payable liability , increase or decrease, is shown as an adjustment in the cash flow from operating activities section.

Interest expense is basically a cost of funds that the company raises. it is therefore a finance cost and is shown as financing activity in income statement.

Since interest expense is a cost for arranging finances for the company, it is a finacing activity and should be treated as such.