On January 1 2016 Yi Corporation received cash from issuing

On January 1, 2016, Yi Corporation received cash from issuing 10-year $100,000 bonds at face value. Interest of $5,000 is paid annually to the bondholders on December 31. How do the issuance of the bonds and the payment of the interest affect Yi\'s financing activities section of the statement of cash flows for 2016?

A) Cash inflow of $100,000

B) Cash inflow of $95,000

C) Cash inflow of $5,000

D) No effect on the financing activities section of the statement of cash flows

Solution

A) Cash inflow is $100000

As bonds were issued so cash was received which increases the cash flow from financing activities. Now interest is treated as a part of opearting activities as it is paid out of the profits genrated from operations. Some accountant think that interest should come under financing activity (making cash inflow as $95000) but the overall view is it should come under operating activity and the operating activity is reduced by interest paid amount.