Calculating Provision for Tax Made During the Year

The question asks to calculate the amount of Tax made to be added to net profits after tax and extraordinary items for the year ended March 31, 2023. This value typically refers to the Provision for Tax made during the year, which is an adjustment commonly made when preparing a Cash Flow Statement using the indirect method.

We are given the opening and closing balances of the Provision for Tax and the amount of Tax paid during the year. We can use this information to determine the Provision for Tax created (made) during the year.

Understanding Provision for Tax

Provision for Tax is a short-term liability shown on the balance sheet. It represents the estimated amount of tax payable for the current accounting period that has not yet been paid. The balance changes due to the provision made during the year (credit) and the tax paid during the year (debit).

Data Provided

Here is the relevant data:

• Provision for Tax on March 31, 2022 (Opening Balance): ₹1,10,000
• Provision for Tax on March 31, 2023 (Closing Balance): ₹80,000
• Tax paid during the year 2022-23: ₹1,20,000

Formula for Calculating Provision for Tax Made

The relationship between the opening balance, closing balance, provision made, and tax paid can be represented by the following formula:

\(\text{Opening Balance} + \text{Provision Made} = \text{Tax Paid} + \text{Closing Balance}\)

Rearranging the formula to find the Provision Made:

\(\text{Provision Made} = \text{Tax Paid} + \text{Closing Balance} - \text{Opening Balance}\)

Step-by-Step Calculation

Let's plug in the given values into the formula:

\(\text{Provision for Tax Made} = ₹1,20,000 + ₹80,000 - ₹1,10,000\)

\(\text{Provision for Tax Made} = ₹2,00,000 - ₹1,10,000\)

\(\text{Provision for Tax Made} = ₹90,000\)

Alternatively, we can visualize this using a simple table representing the flow:

The calculation shows that the Provision for Tax made during the year ended March 31, 2023, is ₹90,000.

Conclusion

The amount of Tax made (Provision for Tax made) during the year ended March 31, 2023, is ₹90,000. This is the amount that would be added back in the indirect method of preparing the Cash Flow Statement to adjust the net profit.

Tax Provision Calculation Summary

To quickly recap the calculation for the Provision for Tax made:

• Start with the Tax Paid during the year.
• Add the Closing Balance of the Provision for Tax.
• Subtract the Opening Balance of the Provision for Tax.

Formula: \(\text{Provision Made} = \text{Tax Paid} + \text{Closing Balance} - \text{Opening Balance}\)

Additional Information on Cash Flow Statement & Tax

In the indirect method of preparing the Cash Flow Statement, the starting point is typically the Net Profit After Tax and Extraordinary Items. To arrive at Cash Flow from Operating Activities, several adjustments are made:

• Non-cash expenses (like depreciation, amortization) are added back.
• Non-cash incomes are deducted.
• Non-operating expenses (like interest paid, loss on sale of asset) are added back.
• Non-operating incomes (like interest received, dividend received, profit on sale of asset) are deducted.
• Provision for Tax made during the year is added back to the Net Profit After Tax to effectively arrive at the Profit Before Tax figure, from which tax paid is later deducted as an operating outflow.
• Changes in working capital items (Current Assets and Current Liabilities excluding Cash and Cash Equivalents, and Bank Overdraft) are adjusted.

The amount of Tax paid during the year is shown as a deduction under Cash Flow from Operating Activities, usually towards the end, before arriving at the Net Cash Flow from Operating Activities.

The amount calculated (₹90,000) is the Provision for Tax made, which represents the tax expense for the year based on the company's profit. This is different from the actual Tax paid (₹1,20,000), which is the cash outflow towards taxes during the year.

Revision Table: Key Tax Concepts