The accounting textbook that I am currently studying indicates that cash flows from financing activities include "any cash flow related to obtaining capital of the company. This category includes the issuance and repayment of debt, common stock transactions, and the
payment of dividends." When I read the description regarding cash flows from operating activities, the cash payment of interest is included. Is this correct? Isn't the payment of interest associated with obtaining funds, thus making it a financing activity?
That's actually a very good question. The board was not unanimous when they decided that interest payments should be classified as operating activities due to the exact argument you present above. I believe the rationale for the current treatment though is that interest expense is included in Net Income and, as such, it should be adjusted out to get to a good cash flow from operations number.
Per ASC 230-10-45-17
All of the following are cash outflows for
operating activities:
a. Cash payments to acquire materials for manufacture or goods for resale, including principal payments on accounts and both short- and long-term notes payable to suppliers for those materials or goods. The term goods includes certain loans and other debt and equity instruments of other entities that are acquired specifically for resale, as discussed in paragraph 230-10-45-21.
b. Cash payments to other suppliers and employees for other goods or services.
c. Cash payments to governments for taxes, duties, fines, and other fees or penalties and the cash that would have been paid for income taxes if increases in the value of equity instruments issued under share-based payment arrangements that are not included in the cost of goods or services recognizable for financial reporting purposes also had not been deductible in determining taxable income. (This is the same amount reported as a financing cash inflow pursuant to paragraph 230-10-45-14(e).)
d.
Cash payments to lenders and other creditors for interest.
e. Cash payment made to settle an asset retirement obligation.
f. All other cash payments that do not stem from transactions defined as investing or financing activities, such as payments to settle lawsuits, cash contributions to charities, and cash refunds to customers.
both ifrs & US GAAP allow it to be treated under either operating activities or financing activites so long as the treatment is consistent from year to year. For the purposes of textbooks/exam questions, I would treat it under opertaing activities unless a question asks for it to be treated under financing activities.
If you got that off of wikipedia, I don't believe that's accurate, at least insofar as US GAAP is concerned. U.S. GAAP desires interest payments to be in the operating section of the cash flow statement.
