Net Interest Expense by P_Gallo

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									Net Interest Expense
Interest Income
Companies sometimes keep their cash hoards in short-term deposit investments [such as
certificates or deposit with maturities up to twelve months, savings account, and money market
funds]. The cash placed in these accounts earn interest for the business, which is recorded on the
income statement as interest income.

Interest income will fluctuate each year with the amount of cash a company keeps on hand.

Interest Expense
Companies often borrow money in order to build plants or offices, buy other businesses, purchase
inventory, or fund day-to-day operations. The borrowed money is converted to an asset on the
balance sheet (i.e., if a business borrows $1 million to build a distribution center, the distribution
center would add $1 million of assets to the balance sheet after the cash was spent.) The interest
a company pays to bondholders, banks, and private lenders, on the other hand, is an expense
that it receives no asset for. Hence, interest expense must be accounted for on the income

Some income statements report interest income and interest expense separately, while others
report interest expense as “net”. Net refers to the fact that management has simply subtracted
interest income from interest expense to come up with one figure. [In other words, if a company
paid $20 in interest on its bank loans, and earned $5 in interest from its savings account, the
income statement would only show interest expense – net $15.]

The amount of interest a company pays in relation to its revenue and earnings is tremendously
important. To gauge the relation of interest to earnings, investors can calculate the interest
coverage ratio.

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