If a company reports its cash flows from operating activities by using the indirect method, the interest expense for the period is included in the company's net income or net earnings. The interest expense will be adjusted to a cash amount through the changes to the working capital amounts, which are also reported as part of the operating activities. In addition, the actual amount of interest paid must be disclosed.
If the cash flow statement, or statement of cash flows, is prepared using the direct method, the amount of interest paid should appear as a separate line within the cash flows from operating activities.
The cash payments and cash receipts of principal on a note payable are reported in the financing activities section of the cash flow statement.