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Deferred taxes in the cash flow statement reflect timing differences between when tax is recorded in the accounts and when it is paid in cash. Positive amounts typically add back to cash, while negative amounts reduce cash.
How it relates
Net Income (CF Statement)Net income on the cash flow statement is the starting profit figure taken from the income statement. The cash flow statement then adjusts this number to move from accounting profit to actual cash generated.+Depreciation & AmortizationDepreciation and amortization are non-cash expenses that spread the cost of assets over time. They reduce reported profit but do not use cash in the current period, so they are added back when calculating cash flow.+Stock-based CompensationStock-based compensation is the value of shares or options given to employees as part of their pay. It counts as an expense in profit, but it does not use cash directly in the period so it is added back in the cash flow.+Deferred Taxes (CF)+Other Non-cash ItemsOther non-cash items capture adjustments that affect reported profit but not current cash, such as write-downs or unrealised gains and losses. These are added back or subtracted to get closer to real cash flow.=Operating Cash FlowOperating cash flow is the cash the business generates from its normal day-to-day operations before investing and financing. It shows how much cash is coming in from customers after paying suppliers and operating costs.
Deferred taxes in the cash flow statement reflect timing differences between when tax is recorded in the accounts and when it is paid in cash. Positive amounts typically add back to cash, while negative amounts reduce cash.
Common sources of deferred taxes:
- Accelerated depreciation: Tax depreciation faster than book depreciation creates deferred tax liabilities
- Revenue recognition: Cash received before revenue is earned for books but taxed immediately
- Expense timing: Some expenses are deductible for tax before they hit the income statement
- Loss carryforwards: Tax losses that can offset future taxable income create deferred tax assets
Cash flow adjustments:
- Increase in deferred tax liability: Added to cash flow (taxes expensed but not yet paid)
- Decrease in deferred tax liability: Subtracted from cash flow (past deferred taxes now paid)
- Change in deferred tax assets: Opposite treatment to liabilities
Why it matters:
- Future cash obligations: Deferred tax liabilities will eventually become cash payments
- Tax planning insight: Large deferred taxes may indicate aggressive tax strategies
- Earnings quality: Recurring deferred tax adjustments affect true cash generation