Question

Callous, Co. sold $1 million in bonds, all of which were bought by Durandal. When Callous pays interest to Durandal, what category of cash outflow is this payment?

Answer 1

Cash Payment of interest is an operating cash outflow for callous. Although when cash is not paid and interest expense is credited to interest payable then cash will increase since income will be less than operating cash.

Students should note that cash received against issue of bond is a financing activity but interest on bonds is operating activity. Both interest paid in cash and interest payable will be adjusted against operating cash flows.

An example is given below for better understanding

Cash Flow Statement
Cash Flow from Operating Activities:
Cash Receipts From Customers	$ 1,272,300.00
Less-Cash Disbursement for
Suppliers	$   (908,000.00)
Selling and Administrative Expenses	$   (239,250.00)
Interest Expense	$      (36,890.00)
A. Cash Flow from Operating Activities		$       88,160.00
Cash Flow from Investing Activities:
sale of Long Tern Investment	$      107,500.00
Purchase of Equipment	$   (269,000.00)
sale of Equipment	$        62,400.00
B. Cash Used in Investing Activities		$     (99,100.00)
Cash Flow from Financing Activities:
Issue of Common Stock	$        21,000.00
Issue of Bonds	$      269,000.00
Dividend paid	$   (301,660.00)
C. Cash Flow from Financing Activities		$     (11,660.00)
Increase (Decrease) in cash [A+B+C]		$     (22,600.00)
Add: cash at the beginning [2014 balance]		$       60,600.00
Cash at the end [2015 Balance]		$       38,000.00

Please note that the Amounts in the example are fictitious.