Tax
and cash profit
Tax payable on profit is
deducted from the cash profit, because tax will be paid and this will reduce
cash inflows, similarly tax saved on depreciation would be added to cash
profit, because such this is tax saving.
Tax
and cash profit Example
ABC Co cash profit is
50,000. Tax rate is 30%, while depreciation charged during the year was 10,000.
Calculate the net cash flow.
Solution
Cash profit = 50,000
Less tax Expenses i.e. 30% of 50,000 (Cash profit) = (15,000)
Add tax saving i.e. 30% of 10,000 (Depreciation) = 3,000
Net Cash Flow = 38,000
It is important to remember that income increase tax expense,
while expense reduces tax expense.
