Which financial statement is indirectly impacted by interest expense, despite not capturing it directly?

The income statement is indirectly impacted by interest expense because it is included in the calculation of net income. While interest expense is a line item explicitly reported on the income statement, its influence extends beyond just its direct entry. For instance, a higher interest expense reduces the overall profitability of the company, which can affect investor perceptions, affect dividends, or lead to changes in retained earnings.

Additionally, the income statement serves as a basis for how these earnings flow into other financial statements. For example, net income from the income statement ultimately impacts the retained earnings in the statement of shareholders' equity, making the relationship between these statements significant. Even though the interest expense itself is not reflected in the balance sheet directly, its effects are felt throughout various aspects of a company’s financial health as shown by these linked statements.

The balance sheet, statement of shareholders' equity, and cash flow statement also have their own relationships to interest expense, but they do not directly report it as part of their primary financial metrics, making the income statement the most relevant answer in regard to this question.