My understanding is that the Interest Expenses shall be recognized on the Income statement whereas Interest Payments is the actual cash outflows of CFO.
Does this mean that CFO will be understated (in case of “discount bond”) and overstated (in case of “premium bond”) since Interest expenses are classified as CFO ?
On the other hand, how about CFF ? Overstated (in case of “discount bond”) and understated (in case of “premium bond”) ?
Hi there, I’m confused as to whether you’re referring to Leases or Bonds. If you’re referring to Bonds, then here’s how I see it (note that I’m new to this stuff myself though):
For a Discount bond, the Interest Expense is more than Interest Payment. Therefore, CFO will be overstated since CFO only includes Interest Payment.
For a Premium bond, the Interest Expense is less than Interest Payment. Therefore, CFO will be understated since CFO includes the Interest Payment.
Very sorry, I am referring to bond rather than lease.
Maybe I shall say, in using Indirect Method to calculate the CFO, we shall add back the amortization (in case of dicount bond) to the net income because the interest expense subtracted from gross income is more than the actual CFO outflows. Conversely, we shall subtract the amortization (in case of premium bond) from the net income because the interest expense subtracted from gross income is less than the actual CFO outflows.
On the other hand, the amortization (difference between the interest expense and interest payment) shall be a portion of CFF.
I think you’re right on the point of us having to add back / substract amortization when it comes to CFO.
However, I don’t think that the amortization (difference between the interest expense and the interest payment) will be a portion of CFF. The amortization portion isn’t an actual cash flow, so there would be no reason to have it included in CFF, either…
For premium bond, interest expense < interest payment (coupon payment, the actual cash outflow) and only the amount of interest expense is classified as CFO (outflow), then what cash flow shall be the excessive cash out flow be classified ? Not CFF ? This is my confusion !
For premium bond, interest expense < interest payment (coupon payment, the actual cash outflow) and only the amount of interest expense is classified as CFO (outflow), then what cash flow shall be the excessive cash out flow be classified ? Not CFF ? This is my confusion !
For premium bond, interest expense < interest payment (actual cash outflow), whereas only interest expense is claasified as CFO (outflow). Then which cash flow shall be classified for the excessive cash outflow ? This is my confusion !