provision for tax and advance payment of tax
This query is : Resolved
27 September 2009
what is the appropriate assumption when the both are given in the problem of cash flow statement.
27 September 2009
For cash flow statement advance payment of tax has to be considered.
28 September 2009
SIR
PLEASE EXPLAIN ME WITH AN EXAMPLE SO THAT I CAN BETTER UNDERSTAND
PLEASE EXPLAIN ME WITH AN EXAMPLE SO THAT I CAN BETTER UNDERSTAND
28 September 2009
what is the appropriate assumption when the both are given in the problem of cash flow statement.
SIR
PLEASE EXPLAIN ME WITH AN EXAMPLE SO THAT I CAN BETTER UNDERSTAND
SIR
PLEASE EXPLAIN ME WITH AN EXAMPLE SO THAT I CAN BETTER UNDERSTAND
10 August 2024
### Provision for Tax and Advance Payment of Tax in Cash Flow Statements
When preparing a Cash Flow Statement, it's important to distinguish between "Provision for Tax" and "Advance Payment of Tax" as they affect cash flows differently. Here’s how to understand and handle them:
#### **1. Provision for Tax:**
- **Definition:** This is an amount set aside from the profit to cover the tax liability expected to be payable in the future. It is a non-cash item and represents a liability on the balance sheet.
- **Impact on Cash Flow Statement:** When preparing the Cash Flow Statement, you need to adjust for changes in provisions for tax. Since it is a non-cash item, it needs to be added back to the net profit in the Operating Activities section.
#### **2. Advance Payment of Tax:**
- **Definition:** This represents the actual cash outflow made during the period towards tax liabilities. It is a cash payment made in advance for future tax liabilities.
- **Impact on Cash Flow Statement:** Advance payments of tax are classified as a cash outflow in the Operating Activities section of the Cash Flow Statement.
### Example to Illustrate
Let’s consider an example to clarify how these items are handled in the Cash Flow Statement.
**Example Scenario:**
- **Net Profit:** ₹1,000,000
- **Provision for Tax (Increase during the year):** ₹200,000
- **Advance Payment of Tax during the year:** ₹150,000
**Cash Flow Statement Preparation:**
1. **Operating Activities:**
- **Net Profit Before Tax:** ₹1,000,000
- **Add: Provision for Tax (Non-Cash Item):** ₹200,000
- **Reason:** Provision for tax is not an actual cash outflow, so it is added back to net profit.
- **Less: Advance Payment of Tax:** ₹150,000
- **Reason:** Advance payment of tax is an actual cash outflow, so it is deducted from net profit.
**Cash Flow from Operating Activities Calculation:**
```
Net Profit Before Tax ₹1,000,000
Add: Provision for Tax ₹200,000
Less: Advance Payment of Tax ₹150,000
------------------------------------------------------------
Net Cash Flow from Operating Activities ₹1,050,000
```
**Explanation:**
1. **Provision for Tax:** Since it's a non-cash item, it is added back to net profit to reflect the actual cash flow.
2. **Advance Payment of Tax:** This represents actual cash spent on taxes, so it reduces the net cash flow.
### Key Assumptions:
- **Provision for Tax:** Adjust for changes in the provision for tax as it impacts the accounting profit but not the cash flow.
- **Advance Payment of Tax:** Directly affects cash flow as it is a cash outflow related to tax payments.
Understanding these adjustments ensures accurate reporting of cash flows, giving a true picture of the company’s liquidity and operational cash position.
When preparing a Cash Flow Statement, it's important to distinguish between "Provision for Tax" and "Advance Payment of Tax" as they affect cash flows differently. Here’s how to understand and handle them:
#### **1. Provision for Tax:**
- **Definition:** This is an amount set aside from the profit to cover the tax liability expected to be payable in the future. It is a non-cash item and represents a liability on the balance sheet.
- **Impact on Cash Flow Statement:** When preparing the Cash Flow Statement, you need to adjust for changes in provisions for tax. Since it is a non-cash item, it needs to be added back to the net profit in the Operating Activities section.
#### **2. Advance Payment of Tax:**
- **Definition:** This represents the actual cash outflow made during the period towards tax liabilities. It is a cash payment made in advance for future tax liabilities.
- **Impact on Cash Flow Statement:** Advance payments of tax are classified as a cash outflow in the Operating Activities section of the Cash Flow Statement.
### Example to Illustrate
Let’s consider an example to clarify how these items are handled in the Cash Flow Statement.
**Example Scenario:**
- **Net Profit:** ₹1,000,000
- **Provision for Tax (Increase during the year):** ₹200,000
- **Advance Payment of Tax during the year:** ₹150,000
**Cash Flow Statement Preparation:**
1. **Operating Activities:**
- **Net Profit Before Tax:** ₹1,000,000
- **Add: Provision for Tax (Non-Cash Item):** ₹200,000
- **Reason:** Provision for tax is not an actual cash outflow, so it is added back to net profit.
- **Less: Advance Payment of Tax:** ₹150,000
- **Reason:** Advance payment of tax is an actual cash outflow, so it is deducted from net profit.
**Cash Flow from Operating Activities Calculation:**
```
Net Profit Before Tax ₹1,000,000
Add: Provision for Tax ₹200,000
Less: Advance Payment of Tax ₹150,000
------------------------------------------------------------
Net Cash Flow from Operating Activities ₹1,050,000
```
**Explanation:**
1. **Provision for Tax:** Since it's a non-cash item, it is added back to net profit to reflect the actual cash flow.
2. **Advance Payment of Tax:** This represents actual cash spent on taxes, so it reduces the net cash flow.
### Key Assumptions:
- **Provision for Tax:** Adjust for changes in the provision for tax as it impacts the accounting profit but not the cash flow.
- **Advance Payment of Tax:** Directly affects cash flow as it is a cash outflow related to tax payments.
Understanding these adjustments ensures accurate reporting of cash flows, giving a true picture of the company’s liquidity and operational cash position.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Is this income indian or foreign income?
- ITC temporary reversal and reclaim
- Applicable TDS rate for sale of property in Nov 2024
- Inventory of finished goods
- Sale of property furniture sale
- REGARDING 25 AS DATE OF PAYMENT AND DATE OF BOOKING
- Quiery in relation to GST liability in case of an advocate who has obtained GST registration.
- Confusion around Form 26QB fields
- Tds on building rent monthly
- Can we claim ITC of Feb-2024 in the month of November-2024 which was not claimed by oversight
- Clarification on Documentation of Paid-Up Capital Contribution by Directors
- TDS under section and rate of TDS
- TDS under section 194Q and TCS under section 206C
- GST input on car insurance and repairs
- GST input on Diwali gift to employee
- GST input on Mobile Handset
- Material and freight in same invoice
- TDS under section 194J inclusive of reimbursement of expenses
- Should I be worried about and rectify reporting Jan,Feb ,March 2024 foreign salary in schedule FA?
- BUYING PROPERTY COULD NOT FILE 26QB
Trending Online Classes
CAclubindia
