How is tax paid in advance shown in a cash flow statement if it is given as an adjustment?

Tax paid in advance refers to the amount of tax paid to the government before the corresponding income or expense is recognized in the financial statements. It is considered as a prepaid expense and is shown as an adjustment in the cash flow statement.

1. Understanding the Cash Flow Statement:
The cash flow statement is a financial statement that provides information about the cash inflows and outflows of a company during a specific period. It is divided into three main sections: operating activities, investing activities, and financing activities. The cash flow statement aims to show how changes in balance sheet accounts affect the cash position of the company.

2. Classification of Tax Paid in Advance:
Tax paid in advance is classified as a prepaid expense because the company has paid the tax in advance, but the corresponding income or expense has not yet been recognized in the financial statements. Prepaid expenses are assets that represent future benefits, which are gradually recognized as expenses over time.

3. Treatment in the Cash Flow Statement:
When tax paid in advance is given as an adjustment in the cash flow statement, it is typically included in the operating activities section. The adjustment is made to reconcile the net income (or loss) reported on the income statement with the net cash provided (or used) by operating activities.

4. Impact on Operating Activities:
In the operating activities section, the adjustment for tax paid in advance is added back to the net income (or loss). This is done because the tax payment made in advance is not an actual expense incurred during the period but rather a timing difference. By adding it back, the cash flow statement reflects the actual cash flow from operating activities.

5. Example:
For example, if a company paid $10,000 in tax in advance during the year, this amount would be added back to the net income in the cash flow statement. If the net income was $100,000, the adjustment would be as follows:
Net Income: $100,000
+ Tax Paid in Advance: $10,000
= Net Cash Provided by Operating Activities: $110,000

Conclusion:
Tax paid in advance is shown as an adjustment in the cash flow statement to reflect the actual cash flow from operating activities. It is added back to the net income (or loss) to reconcile the reported income with the net cash provided (or used) by operating activities. This adjustment helps provide a clearer picture of the company's cash position and its ability to generate cash from its core operations.