A decrease in Taxes Payable will result in a decrease in the cash flows in the Investing Activities
Select one:
True
False
The correct answer and explanation is:
Correct Answer: False
A decrease in Taxes Payable does not directly result in a decrease in cash flows from Investing Activities. The reason for this lies in how taxes payable are classified and handled in financial statements.
Taxes Payable represents the amount of taxes a company owes but has not yet paid. This is recorded as a current liability on the balance sheet. When taxes payable decrease, it means that the company has made a payment towards its tax obligations, which results in a cash outflow.
However, cash flows are categorized into three main activities on the cash flow statement: operating, investing, and financing activities. A decrease in taxes payable primarily impacts the operating activities section. It represents a cash outflow related to the company’s ongoing operations, as taxes are part of the costs incurred in the normal course of business.
Investing activities, on the other hand, are related to the purchase and sale of long-term assets, such as property, equipment, or investments in securities. Taxes payable, or changes in that liability, do not directly affect investing activities. Any cash flow associated with investing activities comes from capital expenditures or proceeds from asset sales, not from tax-related adjustments.
In summary, changes in taxes payable affect cash flows from operating activities, not investing activities. Therefore, a decrease in taxes payable results in a decrease in cash flows from operating activities, not in investing activities.