How Do Interest Charges Affect the Statements of Cash Flows? | Small business
Through Updated on March 05, 2019
As a business owner or executive, you’ve probably looked at each of your company’s major financial statements – the income statement, balance sheet, statement of equity, and statement of cash flows – to assess the property. -be fiscal of your company. What may not be obvious from a review of these documents is how they relate to each other. For example, interest charges carried over to your company’s income statement reduce the amount of cash recorded on the corresponding cash flow statement.
Statement of cash flows
The cash flow statement uses information from your company’s income statement and balance sheet to show whether or not your company was successful in generating cash during the period defined in the report header. Simply put, your business cash flow statement shows how your business has generated and used cash. Your cash flow statement will show your business’s cash inflows and outflows with respect to operations, investments, and financing. The last line of the cash flow statement will reveal whether your business has experienced an increase or decrease in cash flow over a set period of time.
Operating activities in the cash flow statement
The operating activities section of your company’s cash flow statement determines whether the net profit or loss reported on your income statement increased or decreased your company’s cash flow amount. Since your income statement is most likely prepared on the accrual basis of accounting, the operating activities section of your company’s cash flow statement will present the net income recorded in your income statement so that it only includes income that was actually received and expenses that were paid during the weeks or months recorded in the cash flow statement.
This means that your business interest expense will only reduce your business cash flow amount to the extent that your business has set aside money to cover expenses.
Interest expense on the income statement
Since the net profit or loss reported on your company’s cash flow statement already represents the interest expense paid by your business during a given period, the amount paid will not appear on a separate line. your company’s cash flow statement. Instead, the amount of interest expense your business incurred will show up as an item on your income statement under the “non-operating or other” category.
Principle of loan registration
Even though interest expense reduces your cash flow and is recorded in the operating activities section of your company’s cash flow statement and in non-operating expenses in its income statement, the balance of the loan taken out by your company and the principal repayments it makes on the loan are only recorded in the financing activities section of your company’s cash flow statement.
The loan amount and principal repayments made on it do not appear on your company’s income statement because the borrowed money is not considered income generated from the sale of the goods or services of the loan company. your business even if the loan and the payments made on it affect the amount of your cash inflows and outflows from the business.