Q: Please help explain cash taxes, interest, dividends vs accrued taxes, interest expense, and dividends for the purpose of cash flow?
A: A company can recognize income taxes as an expense on its income statement but delay payment in cash. If it did so, it would record an amount for Income Tax Payable on its balance sheet, usually included in a more general account such as Accrued Liabilities. For example, if a company recorded $25,000 for income tax expense for 2021 and paid $20,000 of that amount during 2021, it would record $5,000 of income tax due and payable on its balance sheet. As a result, its accrual income tax expense for the year would exceed its actual cash income tax expense for 2021 by $5,000.
The same logic and process applies to interest expense. The accrual amount for a year may be the same, more, or less than the actual cash amount paid for interest expense. For example, if a company paid $10,000 of interest expense due from 2020 in early 2021 and then recorded accrued interest expense of $50,000 for 2021 and paid that full amount by the end of 2021, its cash interest expense would be $60,000 while its accrual interest expenses would be $50,000. In this instance, cash interest expense exceeds accrual interest expense by $10,000 for 2021.
With respect to dividends, they are usually paid out fully in cash, so the cash and accrual amounts match. But once again, a company could declare $100,000 in dividends and accrue some or all of that amount. If it declared $100,000 of dividends on December 31 but paid out that amount in January 2022, accrual dividends would exceed 2021 cash dividends by $100,000.
Please note that the difference between cash and accrual amounts generally becomes much more pronounced for sales, COGs, and operating expenses. Differences can and frequently exist for a great many of the accrual revenue and expense accounts.
Course overview: Business Income Tax Returns and Cash Flow Analysis