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What is the effect of incurring and paying interest to bondholders (US GAAP) to (a) Equity and (b) statement of cash flows

1. a. no effect b. outflow operating

2. a. decrease b. outflow operating

3. a. no effect b. outflow financing

4. a. decrease b. outflow operating

 

(CMA adapted)

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Question added by Lesley Lanag CMA CPA , Senior Accountant , Takaful Emarat Insurance (P.S.C)
Date Posted: 2015/01/30
VENKITARAMAN KRISHNA MOORTHY VRINDAVAN
by VENKITARAMAN KRISHNA MOORTHY VRINDAVAN , Project Execution Manager & Accounts Manager , ALI INTERNATIONAL TRADING EST.

Option2 &4. a. decrease b. outflow operating

Lesley Lanag CMA CPA
by Lesley Lanag CMA CPA , Senior Accountant , Takaful Emarat Insurance (P.S.C)

Thank you gentlemen for your answers. The correct answer is B and D. Decrease in equity and outflow from operating activities.

 

Interest expense when incurred will decrease net income. Net income is closed to retained earnings (which is an equity account). Should there be no interest expense, equity would be higher. 

 

While loan proceeds and principal repayments are financing activities, interest paid should be reflected as outflow from operating activities. 

Atif Sheikh
by Atif Sheikh , Senior Staff Accountant (Acting Business-Unit-Lead) , Arthur Lawrence

2nd &4th are Correct. Because Interest to Bond Holders is an expense which will reduce and net profit and hence the equity, and its payment will reduce the cash.

mohamed Hakim CMA CPA Candidate
by mohamed Hakim CMA CPA Candidate , Accounting Manager , Andersen saudi arabia

Answer number2 &4 decrease  equity and decrease cash out flow from operating

Entry 

Debit / bonds interest expense 

Credit/ cash 

Why decrease cash flow from operating not finance because it's interest used in operation 

But bond installments or origenal value when paid considered cash out flow from financing activities

 

Mir Mujtaba Ali
by Mir Mujtaba Ali , Internal Audit Manager , Confidential

3 a. no effect b. outflow financing

Deleted user
by Deleted user

You are right because net income will decrease for charging interest of bonds and on other hand this interest  paid is outflow operating activity . Then answer2 is right answer according to GAAP .

Waqas Raza Khan
by Waqas Raza Khan , Accountant , Cold Store Group of Saudi Arabia

Agree with2 and4 is correct

Abdallah Abu Zeyad CMA
by Abdallah Abu Zeyad CMA , Finance Account Manager , Toyota - Abdul Latif Jameel Motors - KSA

Third answer is the correct.

FITAH MOHAMED
by FITAH MOHAMED , Financial Manager , FUEL AND ENERGY CO for transportion petroleum materials

^-_-^

2. a..>>>> decrease b. outflow operating

&

4..>>>>> a. decrease b. outflow operating

Ahmed kandil
by Ahmed kandil , Cost Controller , Battour Holding Cpompany

answer number2

answer number4 

theses answers are correct 

Malik Khalid Mahmood
by Malik Khalid Mahmood , Regional Finance Manager , Leosons International FZ LLC

3. a. no effect b. outflow financing Activities ...

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