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In some questions we work out TAD & Deduct then add the TAD figures back in further down though in some others, TAD is not added in. Can you please advise when it should be added & when not ? Confused!
Just for future reference please do not post the same question on more than one forum at same time (it’s one of general site forum rules). What is TAD? Is that tax allowable depreciation?
A lot depends on the individual question that you seek to answer. It’s difficult to answer your question exactly without an example/s with which to work. The tutor’s response makes a lot of sense –
As I replied a lot depends on individual question at hand. Hope this helps.
There are two ways to work it out.
1) First you deduct TAD to arrive at Profits before tax and then do the tax calculation, then add back TAD to Profit after tax to arrive at cash flows
2) Another method is to just adjust the TAD while computing Tax instead of showing it in the main cash flows calculation.
The net effect of above two is only to reduce the Tax charged by the amount of Tax on the TAD amount.
Eg: PBDT – 100, Tax – 30%, TAD – 20
1) Profits before tax = PBDT (-) TAD = 100 – 20 = 80; Tax = 80*30% = 24, PAT = 80-24 = 56, Cash flow = PAT + TAD = 56+ 20 = 76
2) PBDT = Cash flow from operations = 100, Tax = Tax on the cash flows (-) Tax on TAD = (100*30%)-(20*30%) = 30(-)6 = 24, Net cash flows = Cash flows from operations (-) Tax = 100(-)24 = 76.
Net answer is same in both case 🙂