Cash Flows: Cash Paid for Income Taxes and Other Expenses
A commodities trading company reported interest expense of USD 38 million and tax expense of USD 12 million. Interest payable increased by USD 6 million, and taxes payable decreased by USD 8 million over the period. The amount of cash the company paid for interest and taxes is _closest_ to:
Incorrect.
This answer assumes you subtract the interest payable increase from the reported interest expense:
$$\displaystyle 38{,}000{,}000 - 6{,}000{,}000 = \text{USD }32{,}000{,}000$$
and subtract the taxes payable decrease from the reported tax expense:
$$\displaystyle 12{,}000{,}000 - 8{,}000{,}000 = \text{USD }4{,}000{,}000$$.
Think carefully about the positive or negative effect of each balance on cash flow.
Correct!
Interest expense of USD 38 million less the increase in interest payable of USD 6 million equals interest paid of USD 32 million:
$$\displaystyle 38{,}000{,}000 - 6{,}000{,}000 = \text{USD }32{,}000{,}000$$
and tax expense of USD 12 million plus the decrease in taxes payable of USD 8 million equals taxes paid of USD 20 million:
$$\displaystyle 12{,}000{,}000 + 8{,}000{,}000 = \text{USD }20{,}000{,}000$$.
Incorrect.
This answer assumes you add the interest payable increase to the reported interest expense:
$$\displaystyle 38{,}000{,}000 + 6{,}000{,}000 = \text{USD }44{,}000{,}000$$
and add the taxes payable decrease to the reported tax expense:
$$\displaystyle 12{,}000{,}000 + 8{,}000{,}000 = \text{USD }20{,}000{,}000$$.
Think carefully about the positive or negative effect of each balance on cash flow.
USD 32 million for interest and USD 4 million for taxes.
USD 32 million for interest and USD 20 million for taxes.
USD 44 million for interest and USD 20 million for taxes.
