# Interest paid on loans in Indirect Cash Flow Statement? How does it go?

#### Taachan

Hi everyone,

I have a tricky question here and I hope someone knows how to answer to it. I have a cash flow model in an indirect form. The questions relate to the treatment of interest paid on loans.

Questions:

1. Is interest paid any item on the cash flow statement? Since we start from operating cash flow which starts from net income, doesn't it mean, that interest paid should not appear on any of the three cash flow statements? In case it does not appear on them, will the rest of the questions be useless. In case they do appear, please see the questions below:

2. We can see 4 different outcomes from this in case we remove the interest paid.
A) Removed from operating cash flow: Operating cash flow and total cash flow decrease by 20, but the financial one remains the same
B) Removed from financial cash flow: Operating cash flow remains the same, but the financial gets better as well as total cash flow
C) Not removed from either one of the cash flows - stays as in the model
D) Removed from both cash flows: Operating cash flow goes down by 20, but the financial one gets better by 20. No effect on the total cash flow.

In case the model attached seems OK, what is the reason the interest has been shown like this? Any other comments? Could you also provide a formula for indirect cash flow starting from net income and with a source?

Thank you a lot in advance & Happy New Year!

Br,

Martin

#### ApolloChariot

I guess in that excel model, interest paid was indeed part of net income. If no adjustment is made, it means the 20 interest paid is taken out of operating cash flow

The two adjustments would be made if the company wants to show interest paid as part of financing cash flow instead of operating. To do this, add the 20 to operating and subtract 20 from financing; that’s the two adjustments highlighted.

So to keep it like this, choose option C. To just show interest paid as operating cash flow, choose option D to remove the two highlighted adjustments. There is no plausible case for A or B.

#### Penelopet

Yeah, agree with AppolloChariot, A and B is not an option at all, as for me. I mean, loans are all in all a hard subject to talk about, but people tend to say that they know everything about it and about what they are doing when taking loans... Credit companies most of the time wanna help themselves and not the customer, but they are so persuasive in what they sell that people believe them. Though there are those who do help like this site Credit24 Kredits ® Aizdevums līdz 4000 € ᐈ Atsauksmes • Kontakti | Credit-10 that helped me some years ago.

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#### MLV

Interest expense should not appear on the Cash Flow statement - it is a cash item, but it's already accounted for in the Income Statement, which ends in Net Income. In other words, if you're starting your CF statement with NI, there's no need to double account for Interest expense as it's already baked in. There's no point in having it in a couple of sections in the CF statement just to net it out.

There's one exception to the above if you're using US GAAP (not sure unsure about IFRS): unless you're assuming in your model a portion of the Interest is Paid-in-Kind (PIK) then that wouldn't be a cash outflow, so you can add it back to your Operating Cash Flow as a "non-cash interest expense" adjustment. Similar to D&A, you would add it back to Operating CF because in your Income Statement, you're allowed to decrease your profits to reduce your tax payments, although no cash actually left the Company. PIK interest is pretty uncommon during normal course of business, though (mostly used during LBO transactions and even then, pretty uncommon). Note that in this scenario, you would also need to add the PIK interest to your total debt outstanding, which would in turn generate a higher interest payment during your next business cycle.

#### ApolloChariot

MLV is absolutely correct; after seeing this again, I realize I completely missed that the interest expense did not belong in the cash flow statement.

Check

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#### Gillman

I agree with the idea that credit isnt as easy a topic as it may seem at first. Some people think that debts and loans are normal and natural, but not everyone knows how to use money properly. At this time in the market therere plenty of banks and great competition. So more and more often I consider abandoning their services cause it isnt reliable and therere constant machinations on their part. So if I take a loan (which is very rare) I try to take it from hurtigudbetaling.dk cause they have never let me down. I try to take a small amount of money, which is very important.

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