Taxes are typically based on taxable income, which can differ from cash flow because of non-cash items like depreciation.

Taxes are typically based on taxable income, which can differ from cash flow because of non-cash items like depreciation.

• A. Taxes are based on cash flow.
• B. Taxes are based on revenue.
• C. Taxes are based on taxable income, which can differ from cash flow due to non-cash items.
• D. Taxes are not affected by depreciation.

Answer: (C)

Taxes are based on taxable income, which is determined by tax rules and allowances that include deductions like depreciation. Depreciation is a non-cash expense that lowers taxable income, reducing taxes payable even though no cash is spent for that deduction in the period. This creates a difference between what the company reports as cash flow and what is taxed, since the tax calculation uses taxable income rather than cash flow. That’s why taxes aren’t based on cash flow or revenue, and why depreciation does affect taxes.

Taxes are based on taxable income, which is determined by tax rules and allowances that include deductions like depreciation. Depreciation is a non-cash expense that lowers taxable income, reducing taxes payable even though no cash is spent for that deduction in the period. This creates a difference between what the company reports as cash flow and what is taxed, since the tax calculation uses taxable income rather than cash flow. That’s why taxes aren’t based on cash flow or revenue, and why depreciation does affect taxes.