Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 13 Statement of Cash Flows 595

Interest Expense

The income statement for Rundell Inc. in Exhibit 7 reports interest expense of $8,000.

The interest expense is related to the bonds payable that were outstanding during the

year. We assume that interest on the bonds is paid on June 30 and December 31. Cash

outflow for interest expense of $8,000 is reported on the statement of cash flows as an

operating activity.

If interest payable had existed at the end of the year, the interest expense would

be adjusted for any increase or decrease in interest payable from the beginning to the

end of the year. That is, a decrease in interest payable would be added to interest ex-

pense and an increase in interest payable would be subtracted from interest expense.

This is similar to the adjustment for changes in income taxes payable, which we will

illustrate in the following paragraphs.

Cash Payments for Income Taxes

The adjustment to convert the income tax reported on the income statement to the cash

basis is summarized below.

For Rundell Inc., cash payments for income tax are $83,500, determined as follows:

Income tax $83,000

Add decrease in income taxes payable 500

Cash payments for income tax $83,500

The cash outflow for income taxes exceeded the income tax deducted as an expense

during the period by $500. Thus, $500 is added to the amount of income tax reported

on the income statement in determining the cash payments for income tax.

Reporting Cash Flows from Operating Activities—

Direct Method

Exhibit 8 is a complete statement of cash flows for Rundell Inc., using the direct

method for reporting cash flows from operating activities. The portions of this state-

ment that differ from the indirect method are highlighted in color. Exhibit 8 also in-

cludes the separate schedule reconciling net income and net cash flow from operating

activities. This schedule must accompany the statement of cash flows when the direct

method is used. This schedule is similar to the cash flows from operating activities sec-

tion of the statement of cash flows prepared using the indirect method.

Cash payments

 Decrease in income taxes payable for income tax

or

 Increase in income taxes payable



Income tax
(reported
on income
statement)