Interest paid on the statement of cash flows can be disclosed either under operating or financing activities. No doubt you have seen both being used and it would make sense to have them either under one or the other. None of these is wrong actually and we will explain why.

Operating activities and cash flows from operating activities are in essence those that keep the business going and relate to the everyday proceeds and expenses. They are your payables to suppliers, invoices for goods, sales, receivables from customers etc. What operating also means, is keeping the company liquid enough to have enough resources to keep everyday business going. As it happens, every business has taken some sort of operational loan – either overdraft or short term business loan to finance working assets. When you look at the loan like that – it’s taken to keep the operations going – it only makes sense to have those related interest disclosed under the activities the cash flow relates to.

As the loans themselves are always disclosed under financing though – they are taken to finance the operations per say – the interest can also be disclosed under financing activities to keep them grouped under the main cash flows they are directly connected to.

As you can see, no approach is wrong – they both make sense – and is more or less up to your own preference really. Just make sure that you are consistent.