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Hello,
I’ve watched your lectures on chapter 8 regarding the taxation but is still confuses with one thing. Normally capital allowance is a non-cash item;
1.how come it has the tax saving is used in the cash flow computation?
2. What is the tax saving all about?Thanks in advance.
You have presumably already taken the Paper TX (was F6) exam (or were exempt from it because you studied it at university). You will know therefore that tax is calculated on the profit after charging tax allowable deprecation (capital allowances).
So although the capital allowances are not a cash flow (and are therefore not shown as a cash flow) they do mean that the company will pay less tax than they otherwise would do.You could do separate workings to calculate the tax payable, but it is more efficient to calculate the tax on the operating cash flows and to then show separately the tax that will be saved on the capital allowances. The actual tax paid (which obviously is a cash flow) is the tax on the operating cash flows less the tax saved because of the capital allowances.
I do suggest that you watch the lectures again, because I do explain this with an extra little example.
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