Homework Sourse2 Explain why the income statement is not a good representat
Solution
Net cash flows are different than Income statement.
Net cash flows are pure net cash of an entity. The Income statement is not necessary a pure cash element.
The present value is applied on money or cash directly hence it gives understandable or comprehensive result which can be related to time value of money concept.
Income statement has few non-cash items like depreciation, intangible assets written off etc. which finally results in lower tax. Lower tax means lesser cash outflow. As non-cash items deflate the Income statement hence it will result in lower present value. Whereas in case of Net Cash flows we will experience higher PV because net cash flows ignore non-cash items.
Hence, income statement is not good representation of cash flow.
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Average tax rate
Slab
Allocation of Income = I
Rate = R
Tax = I x R
0-50000
50000
15%
7500
50001-75000
75000
25%
18750
75001-100000
93700
34%
31858
Total
218,700
58,108
Average tax rate = Total tax / Total taxable income
Average tax rate = 58108/218700
Average tax rate = 26.57%
(We don’t have additional income information to calculate marginal tax rate, we will assume raise of income to $225000)
Now, let’s assume that taxable income raised to 225,000 then let’s calculate the marginal tax:
Slab
Allocation of Income = I
Rate = R
Tax
0-50000
50000
15%
7500
50001-75000
75000
25%
18750
75001-100000
100000
34%
34000
Total income
225000
60250
Marginal tax rate = Change in tax /Change in income
Marginal tax rate = 34.00%
| Slab | Allocation of Income = I | Rate = R | Tax = I x R |
| 0-50000 | 50000 | 15% | 7500 |
| 50001-75000 | 75000 | 25% | 18750 |
| 75001-100000 | 93700 | 34% | 31858 |
| Total | 218,700 | 58,108 |
