Provision for taxation and proposed dividend in fund flow, Accounting Basics

Treatment of Provision for Taxation and Proposed Dividend:

As preparing the Funds Flow Analysis, the treatment of condition for Taxation and planned Dividend is very significant.

(a)  Provision for Taxation:   There are two traditions in which this item can be treated.  - i) it can be treated as a Current Liability.  Then, it will diminish the Working Capital in the agenda of Changes in Working Capital / Financial Position (SCFP).   though, payment of tax does not involve Working Capital because it occupy both Current Liabilities account and Current Assets , that is, payment decreases Cash / Bank balance on the one hand and decreases the Current Liability (Tax Provision) by the comparable amount on the other hand. ii)  It can be treated as an misuse of profit - that is, similar to an inner reserve. Beneath this treatment, Working Capital situation is not changed.  Requirements made for Taxation throughout the current year is transferred to adjusted loss and Profit account (or calculation of Funds from Operations).  The amount paid as Tax is revealed as an application of Fund.

(b) Proposed Dividend:  This article also can be treated in two ways - i) This can be measured as Current Liability and in such case, decrease the Working Capital in the SCFP. though, when dividends are paid, it is not take care of as use of Funds. ii)  This can be treated as an appropriation of profits.  In such case, planned dividends for current year are added back to the current year's profit while finding out Funds from operations, if such amount of dividend has previously been charged to profit.  Then, payment of dividend will be revealed as an application of funds.

Posted Date: 10/15/2012 6:28:31 AM | Location : United States







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