Definition of Interest on Bank Loans
The interest on bank loans is usually an expense of the accounting period in which the interest is incurred. Therefore, the interest appears on the income statement and reduces a company’s net income. However, the interest paid also causes a change in the company’s balance sheet and statement of cash flows.
Reporting Interest Paid on the Statement of Cash Flows
In the statement of cash flows, interest paid will be reported in the section entitled cash flows from operating activities.
Since most companies use the indirect method for the statement of cash flows, the interest expense will be “buried” in the corporation’s net income. Net income will be the first item listed in the section cash flows from operating activities and will then be adjusted to the cash amount.
The amount of interest paid must also be disclosed. This is usually done as supplementary information at the end of the statement of cash flows or in the notes to the financial statements.
