1. why losses were carried forward in third year instead of offseting against profit of the co. in other project in U.S. in answer?
2.why depreciation was not added back with cash flow ?(working 5)
Please let me know what I am missing?
1 It is because the losses are in Gamala, so they cannot offset against US profits. They have no other projects in Gamala, but Gamala allows the losses to be carried forward.
2 In the cash flow table itself, there is no depreciation (because obviously depreciation is not a cash flow). However when they have worked out the tax, they have taken the profits before depreciation (the cash flows) and then subtracted tax-allowable depreciation (another word for capital allowances). However this is only for the calculation of the tax charge.
Dont know if this chat is still active, anyway here is the question:
WHy is the tax allowable depreciation is not added back after tax was calculated? The way the answer is presented it seems logical that after calculating the tax (where capital allowance is deducted), it should be added back later? pls help!
There are two ways of dealing with tax.
Either calculate the taxable profit (after capital allowances) then calculate the tax, and then add back the capital allowances (because they are not a cash flow).
The alternative (which is what has happened in the answer to this question) is to calculate the tax on the operating cash flows (before any capital allowances), and separately calculate the tax saving on the capital allowances.
Both approaches give the same answer – the second one is usually quicker and safer.
(It might be worth watching my F9 lecture on this if you are still unclear).
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