13.1 Debt and Interest Schedules

Why a Debt Schedule Is Required

Quick Answer: CFI's three-statement linking rule is specific: interest is an income-statement expense, principal lives on the balance sheet, and the change in principal is cash from financing (CFF). You cannot reverse-engineer principal from the interest line. Build a debt schedule. The rollforward is Opening + draws − mandatory amortization − optional prepay = closing. Interest = rate × average of opening and closing when the case is silent (CFI's teaching default), or rate × opening if the case says so. A revolver is the plug that holds cash at a minimum cash floor. Split closing debt into current (due within 12 months) and long-term. Test leverage and interest coverage with the thresholds the case prints — CFI does not publish official covenant ratios for you to memorize.

CFI's 2026 core stack puts 3-Statement Modeling and Auditing and Balancing a 3-Statement Model immediately before operational modeling. Financial modeling is about 30% of estimated FMVA final weight, and the Excel case studies (CFI's published pace is about 45 minutes per case, 60 maximum, inside a 3-hour, unpausable, 50-question exam) fail when the debt rollforward is missing or when interest is typed as a hardcoded dollar amount. Chapter 10 already stated the linking rule. This section builds the schedule that makes the rule true in live formulas.

A debt schedule is required for a second, practical reason. Interest is a flow. Principal is a stock. The interest line on the income statement does not tell you whether the company borrowed, repaid, or simply sat on a flat balance. Two firms can show the same $600,000 of interest and have completely different year-end debt — one because the rate is 6% on a $10 million average balance, the other because the rate is 12% on a $5 million average balance. Only the rollforward distinguishes those stories, and only the rollforward feeds CFF and the balance sheet.

The Rollforward Identity

Every facility — term loan, bond, notes payable, or revolving credit — gets the same skeleton:

Closing debt = Opening debt + draws − mandatory amortization − optional prepay

Do not put interest in this identity. Interest is not principal. A schedule that does opening × (1 + rate) is treating the loan like a compounding savings account and will double-count cash: you would reduce cash through the income statement (interest) and again through an inflated closing balance.

Mandatory amortization is the amount the borrower must pay this period under the contract. Optional prepay is extra. On the exam, mixing them is a classification error: a cash-sweep prepay can be turned off; a contractual $4 million amortization cannot. If the case gives a 20% per year paydown of original principal, that 20% is mandatory. If the case says "excess cash above $500,000 pays down the term loan," that excess is optional prepay.

Worked Example: Northline Packaging Three-Year Term Loan

Northline Packaging closes a $12,000,000 senior term loan on the first day of Year 1. The credit agreement in the case states:

• Coupon 6.00% per year
• Equal annual mandatory amortization of $4,000,000 (a three-year fully amortizing loan)
• No commitment fee
• Optional prepay allowed without penalty, but management's base plan is $0 optional prepay
• Interest convention not stated — use CFI's default of average balances

Walk Year 1 in words. Opening is the $12,000,000 drawn at the start of the year. There is no additional draw. Mandatory amortization is $4,000,000. Optional prepay is $0. Closing = 12,000,000 + 0 − 4,000,000 − 0 = $8,000,000. Average balance = (12,000,000 + 8,000,000) / 2 = $10,000,000. Interest = 6% × 10,000,000 = $600,000.

Year 2 and Year 3 follow the same formulas with no copied numbers. Year 2 opening is Year 1 closing. If you hardcode Year 2 opening as 8,000,000 instead of linking to Year 1 closing, a later optional-prepay toggle will not flow and the audit checks in Chapter 11 will miss it until you change a driver.

Now add a $1,000,000 optional prepay in Year 2 as a variant. Year 2 closing becomes 8,000,000 + 0 − 4,000,000 − 1,000,000 = $3,000,000. Year 2 average becomes (8,000,000 + 3,000,000) / 2 = $5,500,000, so interest falls to 6% × 5,500,000 = $330,000. Year 3 opening is now $3,000,000. Mandatory amortization cannot exceed remaining principal, so Year 3 mandatory is $3,000,000, not a blind $4,000,000, and Year 3 closes at $0. A formula that pays $4,000,000 in Year 3 after a Year-2 prepay overpays the lender and drives debt negative — an integrity error the case will flag.

Interest Convention: Opening Versus Average

Two conventions appear on FMVA cases. State which one you are using in the schedule header.

On Northline's Year 1, opening-balance interest would be 6% × $12,000,000 = $720,000 — $120,000 more than the average-balance figure. That $120,000 flows through EBT, tax, net income, cash, and (if there is a revolver) the plug. Using the wrong convention is not a rounding difference. It is a different model.

Average-balance interest on a term loan with a fixed amortization schedule is only mildly circular: closing is determined by the principal identity, which does not depend on interest, so I = r × (opening + closing) / 2 can be computed in one pass. Average-balance interest on a revolver is circular, because interest changes cash, which changes the revolver draw, which changes closing revolver, which changes interest. That is the second circular loop from Chapter 11. Gate it with the Circ Switch (blue 1/0). Do not "fix" it by switching the term loan to opening-balance interest while the case asked for average.

Current Versus Long-Term Split

The balance sheet does not show one debt line in a CFI-quality model. It shows current portion of long-term debt (CPLTD) inside current liabilities and the remainder as long-term debt.

CPLTD = principal contractually due within the next 12 months.

For an equal-principal term loan, that is next year's mandatory amortization, capped at remaining principal. It is not an optional prepay you have not committed to. At the end of Northline Year 1, $8,000,000 is outstanding and $4,000,000 is due in Year 2, so the classified stack is $4,000,000 current + $4,000,000 long-term. At the end of Year 2, $4,000,000 is outstanding and all of it is due within 12 months, so $4,000,000 current + $0 long-term. A model that parks the entire $8,000,000 in long-term debt at the end of Year 1 understates current liabilities, overstates current ratio and working-capital ratios, and will miss a current-ratio covenant if the case has one.

A revolver is typically classified as entirely current because it is due on demand or within the facility year. If the case states a multi-year committed facility with no current amortization, follow the case. Do not invent a current split that the credit agreement does not support.

The Revolver as a Minimum-Cash Plug

Operating cash flow, capex, dividends, and term-loan amortization can drive forecast cash negative. CFI models almost never leave cash negative. They insert a revolving credit facility that draws when cash would otherwise fall below a minimum cash floor and repays (but not below zero) when cash would otherwise sit above that floor plus outstanding revolver.

Mechanically, in each forecast year:

1. Compute cash before revolver (the cash you would print if the revolver draw/repay were zero).
2. Required draw = max(0, minimum cash − cash before revolver).
3. Optional repay = max(0, min(opening revolver, cash before revolver − minimum cash)).
4. Closing revolver = opening revolver + draws − repay.
5. Interest on the revolver uses the same convention as the term loan, unless the case splits them.

Worked plug. Northline's case sets minimum cash = $400,000. In Year 1, cash before revolver is $150,000. Opening revolver is $0. Required draw = max(0, 400,000 − 150,000) = $250,000. Closing revolver = $250,000. If the revolver rate is 8.00% and the convention is average, revolver interest = 8% × (0 + 250,000) / 2 = $10,000. That $10,000 reduces net income and cash, so cash before revolver is slightly lower than $150,000 on the next iteration and the draw ticks up by a small amount. That is the intended circular loop. With the Circ Switch set to 0, multiply revolver interest (and usually the plug) by zero so the file can be reset after a #REF! cascade.

The revolver is not a forecast of management's borrowing plan. It is a plug. If the case already gives a term-loan draw that finances capex, do not also let the revolver silently fund the same capex without noticing. A revolver that grows every year while the term loan amortizes is a signal that operations plus capex cannot cover mandatory principal — exactly the credit story a covenant test is meant to catch.

Covenants: Leverage and Interest Coverage

Credit agreements constrain the borrower. FMVA does not publish official covenant thresholds. The case will. Two tests appear constantly:

Suppose Northline's case states maximum Total Debt / EBITDA of 3.50x and minimum EBITDA / Interest of 4.00x. Year 1 EBITDA is $4,800,000. Closing term loan is $8,000,000 and closing revolver is $250,000, so total debt is $8,250,000. Leverage = 8,250,000 / 4,800,000 = 1.72x, under 3.50x — pass. Interest is $600,000 (term) + $10,000 (revolver) = $610,000. Coverage = 4,800,000 / 610,000 = 7.87x, above 4.00x — pass.

If Year 1 EBITDA had been $2,000,000 with the same $8,250,000 of debt, leverage would be 4.13x and the leverage covenant would fail. Interest coverage would be 2,000,000 / 610,000 = 3.28x, also a fail on a 4.00x test. The model should flag this with CFI-style OK / Error conditional formatting. Do not "fix" a failed covenant by silently cutting the mandatory amortization. That would be rewriting the credit agreement.

Net debt versus gross debt matters. Net debt = interest-bearing debt − non-core cash. If the covenant is Net Debt / EBITDA and Northline holds $400,000 of minimum cash that the lender treats as surplus, net debt is 8,250,000 − 400,000 = $7,850,000 and leverage is 1.64x. Using the wrong numerator is as wrong as using the wrong threshold. Read the case definition; do not assume CFI has a single official ratio.

How Debt Hits the Three Statements

Map every line. This is the exam sentence CFI wants:

Northline Year 1, ignoring the revolver for one beat: interest $600,000 on the income statement; CFF principal outflow $4,000,000; balance sheet debt $8,000,000 (of which $4,000,000 current). Starting the cash flow statement from net income already deducted the $600,000. Do not subtract interest again in CFF. That double-count is a classic integrity miss: cash on the BS will not equal ending cash on the CFS, and the plug test from Chapter 10 fails by the after-tax interest amount.

The $12,000,000 origination, if it occurs on the first day of Year 1, is a CFF inflow of $12,000,000 in Year 1 and the opening of the schedule. If it occurred in the last historical year, it is already in historical CFF and the forecast schedule starts at $12,000,000 with forecast CFF equal to amortization only. Match the case timing.

FMVA Exam Traps on Debt Schedules

1. Skipping the schedule and typing interest as a blue dollar amount. When revenue moves, interest should not stay glued unless the case says a fixed coupon on a fixed balance.
2. Using opening-balance interest when the case is silent. CFI's default is average. The Northline Year-1 gap is $720,000 versus $600,000.
3. Putting principal on the income statement or putting interest in CFF after starting from NI.
4. Letting amortization exceed remaining principal after an optional prepay.
5. Parking all debt in long-term and skipping CPLTD.
6. Treating the revolver as an operating cash flow. Draws and repayments are CFF; only the interest hits the P&L.
7. Inventing a 3.0x or 4.0x covenant because it "looks typical." The case states the test. If the case has no covenant, do not add one.
8. Leaving cash negative because you omitted the revolver plug, or leaving iteration on with no Circ Switch so a colleague with iteration off sees zeros.

The schedule is finished when: the rollforward ties, interest uses the stated convention, current + long-term = closing, CFF equals draws minus principal paid, the income statement shows interest, the balance sheet shows the split stock, cash stays at or above minimum, and any case-stated covenant flag is live.