If a company carries a mortgage that has a variable interest rate, which of the following financial statements will be affected if the interest rate rises?
Explanation
Answer - E - All of the financial statements-the balance sheet, the income statement, the statement of retained earnings, and the statement of cash flows-will be affected by the rising interest rate in a variable interest rate, as it will increase the interest expense.
Key Takeaway: When the interest rate rises, the company’s interest expense will rise, so its net income on the income statement will fall. A decrease in net income leads to a decrease in retained earnings on the statement of retained earnings and on the balance sheet. The company pays off the added interest with cash, which is an asset, so assets on the balance sheet fall. Finally, the increase in cash interest payments is also reflected on the statement of cash flows, producing a decline in net cash provided by operating activities.
