Why is Interest Expense Included in the Operating Activities Section of the Cash Flow Statement?
Paragraph 23 of the Statement of Financial Accounting Standards No. 95, Statement of Cash Flows, (Financial Accounting Standards Board, www.fasb.org) requires that "cash outflows for operating activities are: ...d. Cash payments to lenders and other creditors for interest..." [Three of the seven members of the FASB at the time dissented to this requirement. They would have preferred that interest paid be reported as a financing activity.]
Under the indirect method of preparing the statement of cash flows, the operating activities section begins with net income. This means that the interest expense is already contained within the net income amount and will be adjusted to cash amount of interest paid by reflecting the change in Interest Payable.