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

Option2 &4. a. decrease b. outflow operating

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. 

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.

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

3 a. no effect b. outflow financing

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 .

Agree with2 and4 is correct

Third answer is the correct.

^-_-^

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

&

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

answer number2

answer number4 

theses answers are correct 

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