Tax
and cash Flows
Tax on profit or income
will reduce your cash flows, because you need to pay tax which is an outflow of
cash, while tax on expense will reduce improve your cash flow due to tax saved
on expenses.
Expenses = save tax = tax payment reduces= cash outflow
reduces
Income = Tax imposed= Tax payment = cash outflow increases
Tax
and cash flows Example
ABC Co cash profit for the
year ended 2001 is 70,000. Tax rate applicable on company is 30%, depreciation expense
during the year 2001 was 20,000. Calculate the net cash flow.
Solution
Cash profit = 70,000
Less tax Expenses i.e. 30% of 70,000 (Cash profit) = (21,000)
Add tax saving i.e. 30% of 20,000 (Depreciation) = 6,000
Net Cash Flow = 55,000
It is important to remember that income increase tax
expense, while expense reduces tax expense.
