When companies publish their financial results, the statement of cash flow accompanies the balance sheet and the income statement. The balance sheet and income statement reveal financial activities that occurred during the period, such as inventory purchases or credit sales, that involve no cash transfer. The statement of cash flow shares information regarding the transfer of cash in and out of the organization. It allows investors to see how the company managed its cash during the period. The company reports interest paid and dividends paid in different sections of the statement of cash flow.
The statement of cash flow includes three separate sections, the operating activities, investing activities and financing activities. The operating activities section of the statement of cash flows summarizes the cash transactions, which are a result of the company’s primary operation. The investing activities section includes information about cash paid for investments, such as equipment or securities purchased, or cash received for investments sold. The financing activities section includes information regarding the company’s loans or shares of stock.
Interest expense paid by the company appears in the operating activities section of the statement of cash flow. The operating section starts with the net income reported by the company. The interest expense contributes to the calculation of the net income and appears in this section through the net income. Because the company may not have paid all of the interest expense it incurred, it considers the change in the interest payable account. If the interest payable account increased, the company paid less. If the interest payable account decreased, the company paid more.
Dividends paid appear in the financing section of the statement of cash flow. Shareholders provide funding for the company to pursue its operations. Any money returned to the shareholders represents a return of the shareholder’s money, and an adjustment to the company’s financing.
A few differences appear in the way interest and dividends paid appear in the statement of cash flow. Both payments appear in different sections of the statement. Dividends paid appear in the financing section, while interest paid appears in the operating section. The dividends paid appear as a specific payment. The interest paid appears as a combination of net income and an adjustment to net income.
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