Taxes and Cash Flow
Taxes are included in the calculations for the operating cash flow. Cash flow from operating activities is calculated by adding depreciation to the earnings before income and taxes, and then subtracting the taxes. The operating cash flow indicates the cash a company brings in from ongoing, regular business activities. The operating cash flow can be found on a company's cash flow statement in the financial reporting done annually and quarterly.
The operating cash flow is important when considering whether the company can generate enough positive funds to maintain and grow its operations. If not, the company may require external financing. Shorter turnover rates in inventory and shorter times for receiving funds increase the operational cash flow. Items such as depreciation and taxes are included to adjust the net income, rendering a more accurate financial picture. Higher taxes and lower depreciation methods adversely impact the operational cash flow.
Investors find it important to look at the cash flow after taxes, which indicates a corporation's ability to pay dividends. The higher the cash flow, the better the company is financially and the better positioned it is to make distributions. Income the company has from outside of its operations is not included in the operational cash flow. Any dividends paid and infrequent long-term expenses are often excluded from this calculation as well.
One-time asset sales are also noted, as they inflate the cash flow numbers during the relevant time period. Investors look at the balance and income statements to gain a better knowledge of the overall health of a company.