Under USGAAP, the Classification of Interest Expense as an Operating Activity

question 95

Multiple Choice

Under U.S.GAAP, the classification of interest expense as an operating activity and dividends paid on common or preferred shares as a financing activity appears inconsistent to some observers as both are payments to suppliers of funds.Authoritative guidance requires the different treatments because

• A)interest is an expense in computing net income.
• B)dividends represent a distribution of assets generated by net income not an expense reducing net income.
• C)interest represent a distribution of assets generated by net income not an expense reducing net income.
• D)dividends is an expense in computing net income.
• E)both choices a and b are correct.

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Definitions:

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