Financing Cash Flows

Explanation

Interest payments and receipts are classified as operating cash flows.

According to the Generally Accepted Accounting Principles (GAAP) classification of cash flows, financing cash flows refer to cash transactions that involve obtaining or repaying capital to finance the company's activities. These cash flows typically include transactions with owners (shareholders) and creditors (lenders). The primary purpose of financing cash flows is to change the company's capital structure.

Let's analyze each answer choice to determine which one is not classified as a financing cash flow:

A. Share repurchase: When a company repurchases its own shares from shareholders, it is considered a financing activity because it involves the use of cash to reduce the company's equity. This is typically done to return capital to shareholders or to adjust the ownership structure. Therefore, share repurchase is classified as a financing cash flow.

B. Interest paid on new debt: This answer choice suggests that interest paid on new debt is not classified as a financing cash flow. However, this statement is incorrect. Interest paid on new debt is indeed classified as a financing cash flow. When a company borrows money by issuing debt instruments (such as bonds), the interest payments made to lenders are considered financing cash outflows. These payments reflect the cost of financing and are classified as interest expense in the income statement.

C. Losses on debt retirement: When a company retires or repays its existing debt before its maturity date, any losses incurred in the process are considered financing cash flows. These losses represent the difference between the carrying value of the debt and the amount paid to retire it. As a result, losses on debt retirement are classified as financing cash flows.

D. Dividends paid out: Dividends paid out to shareholders are not considered financing cash flows; instead, they fall under the category of operating cash flows. Dividends represent a distribution of profits to shareholders and do not directly affect the company's capital structure. Therefore, dividends paid out are not classified as financing cash flows according to GAAP.

In conclusion, the correct answer is D. Dividends paid out. This choice is not classified as a financing cash flow under GAAP, as dividends fall under the category of operating cash flows.