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Why is income tax not added to back to net income when calculating CFO although tax on the income statement is not the actual amount paid – we start with net income which is profit after tax and then we deduct the actual tax paid in CFO, shouldn’t we have added tax to net income because it is not the actual cash paid, other wise, it is as if it is deducted twice.
I am so curious about the answer to this.
Thanks,
Hmmm! The answer is surprisingly simple!!!!
We don’t start with “Profit after tax”
We start with “Profit before tax” ……..
……. and that’s why we don’t add tax back
Ok?
Thank you Mr Mike. This answer has actually occurred to me, but I have seen a question a while back (not in ACCA materials) where they started with net income and did not add tax, it was a little multiple choice question, not a comprehensive one and they seem to have completely ignored tax in it and didn’t provide enough info to calculate actual tax paid and deduct it later, so I guess they wanted to keep tax out of the problem all together that’s why they didn’t add it, or else, it was an error on their side.
Anyhow, now I am confident that I was right – Thanks for the response.
Maha
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