XYZ Company has decided to issue $10 million of unsecured bonds. If issued today, the 4% semi-annual coupon bonds would require a market interest rate of 12%. Under U.S. GAAP, how will these bonds affect XYZ's statement of cash flows?

It is the coupon payment, not the interest expense, that results in an outflow of cash. The difference between the coupon payment and interest expense is the discount amortization. The amortization does not result in a cash outflow. Under U.S. GAAP, the coupon payment is reported as an operating cash flow. The discount, when paid at maturity, is reported as a financing cash flow.