Question

What is the difference or distinction being made when we speak of before-tax cash flows and before-tax and loan cash flows? And how does this impact the income taxes?

Show equation for Year 1 and 0 and fill in table please. Thanks

Answer 1

Cash Flow before Tax

The cash flow of an investment is calculated by adding back any deducting of income tax payments. For example:

Non-Cash Expenses & Appropriations:-

1. Non-Cash expenses are not considered under the direct method because out-flow of cash has not occurred. Such expenses includes

• Depreciation
• Preliminary Expenses
• Underwriting commission.
• Discount on Issue of Shares/Debentures.
• Goodwill/Patents and Copyrights.

1. Appropriations like

• Transfer to General Reserve.
• Proposed Dividend.
• Provision for Taxation etc.

Cash Flow before Tax, Interest and Loans:-

Impact of Cash Flow before Tax on income taxes:

Generally, the Income Tax paid (Net of Tax Refund) is classified as an operating activity and shown separately. However, if the taxes are identified with the financing or investing activity, then cash flow on account of taxes is classified as Financing or Investing Activity. For example - if a piece of land is sold and the company earns a capital gain. The income tax on such a gain can be identified with investing activity and therefore, is shown as investing activity as a separate item. Similarity, a company pays tax when dividend is paid. The income tax so paid can be identified with financing activity and therefore, is shown as financing activity as a separate item.