Commerce Exam > Commerce Questions > Income tax paid is concerned with__________a)...
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Income tax paid is concerned with__________
- a)Financing Activities
- b)Investing Activities
- c)Both Investing Activities and Financing Activities
- d)Operating Activities
Correct answer is option 'D'. Can you explain this answer?
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Income tax paid is concerned with__________a)Financing Activitiesb)Inv...
Income tax is concerned with only operating activities. Tax paid is deducted at the end while calculating Cash flow from operating activities.
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Income tax paid is concerned with__________a)Financing Activitiesb)Inv...
Understanding Income Tax in Cash Flow Statements
Income tax paid is categorized under Operating Activities in the cash flow statement. This classification is crucial for understanding a company’s cash flow dynamics.
Reasoning Behind the Classification
- Nature of Operating Activities:
- Operating activities include the primary revenue-generating activities of a business, such as selling goods or providing services.
- Income tax is a direct result of these operations, as it is calculated based on the profits earned from these activities.
- Impact on Cash Flow:
- Income tax payments affect the net cash flow from operating activities. It represents cash outflow necessary to comply with tax obligations.
- This outflow directly correlates with the income derived from operational activities, thus impacting the overall profitability and cash management of the business.
Contrast with Other Activities
- Investing Activities:
- These involve transactions related to the purchase and sale of long-term assets and investments, such as property or equipment.
- Income tax does not pertain to these transactions, as it is not a direct consequence of acquiring or disposing of assets.
- Financing Activities:
- Financing activities are related to transactions involving equity and debt, such as issuing stocks or borrowing funds.
- Similar to investing activities, income tax does not arise from these transactions.
Conclusion
In conclusion, income tax paid is classified under operating activities because it directly relates to the core business operations that generate income. Understanding this classification helps stakeholders analyze a company's operational efficiency and cash flow management effectively.
Income tax paid is categorized under Operating Activities in the cash flow statement. This classification is crucial for understanding a company’s cash flow dynamics.
Reasoning Behind the Classification
- Nature of Operating Activities:
- Operating activities include the primary revenue-generating activities of a business, such as selling goods or providing services.
- Income tax is a direct result of these operations, as it is calculated based on the profits earned from these activities.
- Impact on Cash Flow:
- Income tax payments affect the net cash flow from operating activities. It represents cash outflow necessary to comply with tax obligations.
- This outflow directly correlates with the income derived from operational activities, thus impacting the overall profitability and cash management of the business.
Contrast with Other Activities
- Investing Activities:
- These involve transactions related to the purchase and sale of long-term assets and investments, such as property or equipment.
- Income tax does not pertain to these transactions, as it is not a direct consequence of acquiring or disposing of assets.
- Financing Activities:
- Financing activities are related to transactions involving equity and debt, such as issuing stocks or borrowing funds.
- Similar to investing activities, income tax does not arise from these transactions.
Conclusion
In conclusion, income tax paid is classified under operating activities because it directly relates to the core business operations that generate income. Understanding this classification helps stakeholders analyze a company's operational efficiency and cash flow management effectively.
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Income tax paid is concerned with__________a)Financing Activitiesb)Investing Activitiesc)Both Investing Activities and Financing Activitiesd)Operating ActivitiesCorrect answer is option 'D'. Can you explain this answer?
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