Provision for Tax in Cash Flow Statement

(1) If the provision for taxation account appears only in the balance sheet:

In this case the previous year amount is treated as outflow in operating activities and the current year amount is added while calculating the profit before tax.

(2) If the provision for taxation account appears in the balance sheet and additional information is also given regarding the payment or provision for tax during the year. In this case the Provision for Taxation account is to be prepared, and the treatment done accordingly.

Dr.                                                 Provision for Taxation account                                                Cr.

Particulars`Particulars`
To Bank (Tax paid) {Operating, Outflow}

To Balance c/d (Closing balance)

By Balance b/d (opening balance)

By Profit & Loss Account (Provision made during the year) {PBT, Add}

TotalTotal

(3) If only additional information is given regarding Provision for Tax made or Tax paid, the same amount given is to be treated as outflow in operating activities and is added while calculating Profit before Tax.

 

Refund of Tax

Whenever Refund of Tax is given in additional information, it is subtracted next to Provision for Tax, while calculating Profit before Tax and added next to Tax paid while calculating Cash from Operating Activities.

 

Provision for Tax in Cash Flow Statement

Taxes on Capital Profits and Dividend distributed

Besides Income Tax, there can be capital gains tax (tax on capital profits on fixed assets sold), dividend tax (tax on the amount distributed as dividend to shareholders).

As per AS-3 cash flows arising from taxes on income should be separately disclosed in different activities. Such Cash flows should be classified as cash flows from operating activities if they cannot be specifically identified with financing and investing activities.
Thus, they should be treated as:

  1. Tax on operating profit - Operating Activities.
  2. Dividend tax - Financing activity along with dividend paid.
  3. Capital gains tax - Investing activities.

 

Depreciation in Cash Flow Statement

Proposed Dividend in Cash Flow Statement

Class 12 Accountancy MCQs Cash Flow Statement