Accountancy Part BCash Flow Statement

Dividend Tax paid by a company is :

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Financing Activity

Taxes on income are normally operating cash flows, but a tax that can be identified with a financing item goes with that item. Dividend tax is tax on the dividend distributed to shareholders, so it is shown under financing activities along with the dividend paid.

Why the other options are incorrect

Option (1) Operating Activity — Incorrect. Only tax on operating profit is an operating cash flow.
Option (2) Investing Activity — Incorrect. The tax is not linked to buying or selling long-term assets or investments.
Option (4) No flow — Incorrect. The tax is paid in cash, so it is a cash outflow.

NCERT (2026-27 edition):
Taxes on Income and Gains – “… AS-3 requires that cash flows arising from taxes on income should be separately disclosed and should be classified as cash flows from operating activities unless they can be specifically identified with financing and investing activities. This clearly implies that: tax on operating profit should be classified as operating cash flows. dividend tax, i.e., tax paid on dividend should be classified as financing activity along with dividend paid.”

Dividend Tax paid by a company is :

Answer & explanation

Correct answer: option 3

The correct answer is Option (3) → Financing Activity

Why the other options are incorrect

Option (1) Operating Activity — Incorrect. Only tax on operating profit is an operating cash flow.
Option (2) Investing Activity — Incorrect. The tax is not linked to buying or selling long-term assets or investments.
Option (4) No flow — Incorrect. The tax is paid in cash, so it is a cash outflow.