Question

If a company that provides gardening services has to pay the bank interest on a loan requested to buy the mowers at the end of the month, in which group of the cash flow statement do you classify this payment and why?

Answer 1

Cash Flow Statement is broadly divided in to three segments - Operating activities, Investing activities and from financing activities.

In this given case, the company is in to providing Gardening services and hence this is a Non-Financial company.

The Interest expense shall be part of the Income Statement to compute the Net Income;

Hence, in the Cash Flow statement, the interest income is added back to the Net Income to report the Operating Profit under "Cash Flows from Operating Activities" and further the actual interest expense shall be shown as negative cash flows under "Cash Flows from Financing Activities".