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.

Question

Quizplus · Accepted Answer

Interest expense is classified as an operating activity because it is considered an expense in computing net income, while dividends paid are classified as a financing activity because they represent a distribution of assets generated by net income, not an expense reducing net income.

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