Cash Flows: Cash Paid for Income Taxes and Other Expenses

Suppose that Wiley, Inc. has $57,000 of income tax expense. Taxes receivable has decreased by $13,000, and taxes payable has decreased by $6,000. How much did Wiley, Inc. pay in income tax?

Incorrect. Remember, a decrease in taxes receivable reduces the amount paid, whereas a decrease in taxes payable increases the amount of cash paid. The income tax expense is not always the amount paid during the period.

IFRS and US GAAP both include cash paid for income tax on the cash flow statement. Where do you think cash paid for income tax should go on the cash flow statement according to US GAAP?

Incorrect. Remember, a decrease in taxes receivable reduces the amount paid, whereas a decrease in taxes payable increases the amount of cash paid. If the change in the receivables and payables was added to the expense, it would be $76,000.

Incorrect. US GAAP does not allow cash paid for income tax to be an investing activity.

Incorrect. US GAAP does not allow cash paid for income tax to be included as a financing activity.

Correct. Under US GAAP, cash paid for income tax will be included as an operating activity. Under IFRS, the cash paid for income taxes will normally be included as an operating activity, but it may be classified as an investing or financing activity at times.

Excellent! The income tax expense will be reduced by the decrease in taxes receivable and increased by the net decrease in taxes payable: $$\displaystyle \$57,000 - \$13,000 + \$6,000 = \$50,000 $$.

Suppose that operating expenses are $15,785 and presents the beginning and ending prepaid expenses and accrued liabilities below: | Account | Ending | Beginning | |---------------------|---------|---------| | Prepaid Expenses | $25,275 | $32,781 | | Accrued Liabilities | $28,972 | $24,821 | How much cash did Wiley, Inc. pay for other operating expenses this year?

To calculate the amount of __cash paid for other operating expenses__, Wiley, Inc. must start with other operating expenses from the income statement, add the net increase in prepaid expenses (or subtract a net decrease in prepaid expenses), and subtract the net increase in accrued liabilities (or add a net decrease in accrued liabilities).

Great! Prepaid expenses decreased by $7,506 which means less cash was paid this period. Accrued liabilities increased by $4,151 which also reduces the amount of cash paid for other operating expenses: $$\displaystyle \$15,785 - \$7,506 - \$4,151 = \$4,128 $$.

Incorrect. A net increase in prepaid expenses will be added to operating expense, and a net decrease will be subtracted. For accrued liabilities, a net increase will reduce the amount of cash paid, and a net decrease will increase the amount of cash paid for other operating expenses.

Incorrect. A net increase in prepaid expenses will be added to operating expense, and a net decrease will be subtracted. For accrued liabilities, a net increase will reduce the amount of cash paid, and a net decrease will increase the amount of cash paid for other operating expenses.

To summarize: [[summary]]

To calculate __cash paid for income taxes__, you should start with the income tax expense from the income statement. Then you add the net increase (subtract the net decrease) in taxes receivable and deferred taxes and subtract the net increase (add the net decrease) in taxes payable.

$38,000

$50,000

$76,000

Operating activities

Investing activities

Financing activities

$4,128

$12,430

$19,140

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