treatment of refund of income tax in cash flow statement
and why ?
Dear Student,
As Income tax payment relates to operating Activities of a business, so refund of income tax is added to operating Activities or shown as inflow of cash under Operating Activities.
So, if we are following Direct Method of Cash Flow then the refund of income tax would be just added to Cash generated from operations to reach Cash flow before extra-ordinary items as follows :
But if we are following Indirect Method then we need to first deduct the refund received from Net Profit / Loss for the year & then add it back as follows:
Regards,
As Income tax payment relates to operating Activities of a business, so refund of income tax is added to operating Activities or shown as inflow of cash under Operating Activities.
So, if we are following Direct Method of Cash Flow then the refund of income tax would be just added to Cash generated from operations to reach Cash flow before extra-ordinary items as follows :
| Cash Flow from operating Activities: Direct Method | |
| Particulars | Amount |
| Cash Receipts from customers | XXX |
| Less : Cash paid to suppliers & employees | (XXX) |
| Cash generated from operations | XXX |
| Add/Less: Income Tax Refund/(Income tax Paid) | XXX/((XXX) |
| Cash flow before extra-ordinary items | XXX |
But if we are following Indirect Method then we need to first deduct the refund received from Net Profit / Loss for the year & then add it back as follows:
| Cash Flow from operating Activities: Indirect Method | |
| Particulars | Amount |
| Net Profit/Loss for the year | XXX/(XXX) |
| Less : "Income tax refund/(Income tax paid)" | (XXX) |
| Net Profit before Tax | XXX |
| Add/Less: Adjustments for Non-cash Expenses / Extraordinary Items | XXX/((XXX) |
| Operating Profit before Working Capital changes | XXX |
| Add/Less: Adjustments for working capital | XXX |
| Cash generated from operations | XXX |
| Add/Less: "Income Tax Refund"/(Income tax Paid) | XXX |
| Cash flow before extra-ordinary items | XXX |
Regards,