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    Question

    In a Cash Flow Statement, Income Tax Paid should

    generally be disclosed as a cash flow from ______
    A Financing Activities. Correct Answer Incorrect Answer
    B Investing Activities. Correct Answer Incorrect Answer
    C Operating Activities, unless specifically identified with other activities. Correct Answer Incorrect Answer
    D Apportioned between Operating and Investing based on if it is corporate tax or capital gain tax Correct Answer Incorrect Answer
    E Directly reduced from net cashflow after 3 activities as it is a statutory outflow Correct Answer Incorrect Answer

    Solution

    Under AS-3 and Ind AS 7, cash flows arising from taxes on income must be separately disclosed and are classified as cash flows from Operating Activities. This is because taxes are generally associated with the overall profit-generating activities of the entity. However, the standard provides an exception: if the tax cash flow can be specifically identified with an Investing activity (e.g., capital gains tax on the sale of a factory) or a Financing activity, it should be classified accordingly.    Please note – The option D may look correct too, however the accounting standards mandate that tax be shown as Operating by default. It is only moved if it can be specifically identified with another activity; it is not apportioned as a standard rule

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