how does income tax impact cash flow statement? In the operating activities section of the cash flow statement, income tax affects cash flow. Due to the fact that payments of taxes reduce the company’s cash, they are recorded as a transfer from cash. Using the indirect method however, income tax expense (from the income statement) is adjusted and may be modified by taxes paid versus actual taxes because deferred taxes or prepayments differed. Tax refunds are also recorded as cash inflows. It helps the businesses understand the tax effects of cash flow and to manage cash flows more precisely whereas they can also estimate future tax programs.

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