**Treatment of Income Tax Paid in Advance in Cash Flow Statement**

When preparing a cash flow statement, the treatment of income tax paid in advance depends on whether it is considered as an operating activity or as a financing activity. The classification is determined based on the nature and purpose of the income tax payment. Let's discuss the two possible scenarios:

**1. Income Tax Paid in Advance as an Operating Activity:**

If the income tax paid in advance relates to future income tax liabilities and is expected to be utilized within the operating cycle of the business, it is treated as an operating activity. In this case, the income tax paid in advance is added back to the net income in the operating activities section of the cash flow statement. The rationale behind this treatment is that the cash outflow for income tax paid in advance does not represent an expense incurred during the period but rather a prepayment of future tax obligations.

**2. Income Tax Paid in Advance as a Financing Activity:**

If the income tax paid in advance does not relate to future income tax liabilities but rather represents an advance payment towards income tax obligations of a subsequent period, it is treated as a financing activity. This could occur when a company makes a lump sum payment of income tax in advance to the tax authorities. In this case, the income tax paid in advance is classified as a financing activity and is presented under the financing activities section of the cash flow statement.

It is important to note that the classification of income tax paid in advance as either an operating activity or a financing activity may vary based on the specific circumstances and accounting principles followed by the company. Therefore, it is recommended to refer to the applicable accounting standards or consult with a professional accountant for accurate classification and treatment of income tax paid in advance in the cash flow statement.

Overall, the treatment of income tax paid in advance in the cash flow statement depends on the nature and purpose of the payment. It is crucial to understand the specific circumstances of the payment and the applicable accounting principles in order to accurately classify and present it in the cash flow statement.

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