Question

1. Why are taxes deducted from the sum of EBIT (earnings before interest and taxes) and depreciation when calculating operating cash flow?

   	A.	Because taxes are cash inflow.
   	B.	Because taxes should not be paid.
   	C.	Because higher taxes lead to higher operating cash flow.
   	D.	Because taxes are paid in cash to the Internal Revenue Service.

Answer 1

Tax is deducted from the sum of EBIT and depreciation when calculating operating cash flow-

D. Because taxes are paid in cash to the internal revenue service.

Taxes are paid by a company on the profit it makes in a year. These taxes are deducted from the sum of EBIT and depreciation to obtain the operating cash flow. As this is an outflow of cash from the company to the internal revenue service, we deduct it from the operating cash flow.

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