Why is Interest Expense Included in the Operating Activities Section of the Cash Flow Statement?

Definition of Interest Expense

Interest expense is the cost of borrowing money. Under the accrual method of accounting, interest expense is reported on a company's income statement in the period in which it is incurred. Hence, interest expense is one of the subtractions from a company's revenues in calculating a company's net income.

Example of Interest Expense on the Cash Flow Statement

Since most companies use the indirect method of preparing the cash flow statement (or statement of cash flows), the company's interest expense will be contained within the company's net income, which is the first amount presented in the cash flows from operating activities.

The interest expense contained in the net income will be changed from the accrual amount to the cash amount by the change in the current liability Interest Payable.

Since interest expense is an important amount, the statement of cash flows must disclose the amount of interest paid. This is often achieved through a supplementary disclosure.

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