Cashflow Statement Treatment of Loans

I have been looking into this topic for many hours and it seems to be totally ambiguous and I’ve been seeing different answers. Want to have a concrete understanding of how the cashflow statement works. Would appreciate if someone could check if my assumptions listed here are right:

Let’s say a financial institution has both borrowed and lent out money in the form of a loan…

Here are how I am assuming a financial institution would treat each entry:

You Borrow Money

Beginning of t = 0

DR Cash --> Cash received from borrowing money --> CFF Inflow

CR Loan Payable --> Initial record to show you (the bank) owe a party money --> No CF/S Entry

End of t = 0

DR Interest Expense --> Paying interest to the party that you owe money to --> CFO outflow

DR Loan Payable (aka loan amortization) --> You paying off the principal that you owe --> CFF outflow


You Lend Out Money

Beginning of t = 0

DR Loan Receivable --> Initial record to show you’ve lent out $$, so no CF/S entry

CR Cash --> You lent out $ as loan --> CFF outflow

End of t = 0

CR Loan Receivable (aka loan amortization) --> You receive some principal amount from the party that owes you money, so CFF inflow

CR Interest Revenue --> Interest received on money you lent out, so CFO inflow

Also, CR Cash: you make the payment.

Note that you’ll debit Loans Payable only if the loan is amortizing.

This will be a CFO outflow if you’re in the business of lending money.

Also, DR cash: you receive a payment.

Note that you’ll credit Loans Receivable only if the loan is amortizing.

Thank you!!! My bad on the Cash entry at end of t = 0… so at the end of t = 0:

  • Both the DR Cash and CR Cash entries will both not have any effect on the Cash Flow Statement?

I agree with your “You borrow money” set, although I believe IFRS allows interest expense to flow through CFF.

As for loaning out money, as magician notes it may be in CFO, although it may be in CFI (definitely not CFF). Ay my own employer, if it is a loan that we plan to sell (for example mortgages) it is CFO. If it is a loan we plan to hold for investment, then CFI. I believe this split makes sense and is not uncommon. Interest received is CFO, and principal payments are CFI (assuming you put the fundings there)

As for your last question, even if your DR and CR cash for the same amounts, they may be in different line items on the CF Statement, so even if they net to zero you may still need to show them separately.

Thank you @40yoCFAcandidate!!!

This may seem stupid, but the Interest Paid / Interest Received rules here only apply to the direct method, right? So for Indirect Method, you would just use Net Income?

Right. With the indirect method you start with net income and adjust. You’d probably see a line in CFO titled “change in accrued interest”. If you want to see actual interest paid you would need to go to the notes. Or as a proxy you could take Interest Expense from the Income Statement ± the change in accrual. I think you’d then just be off any non cash amortization in interest expense…I have never seen the Direct Method used in practice but it would be more revealing than the indirect method.

That explains a lot, thank you both!!!

My pleasure.