For operating working capital (OWC) forecasting, which tax figure should be used?

For operating working capital (OWC) forecasting, which tax figure should be used?

• A. Balance sheet tax figure
• B. Income statement tax expense
• C. Deferred tax liability
• D. Tax payable in the current year

Answer: (A)

Operating working capital forecasting focuses on cash movements within the operating cycle, so you should anchor tax impacts to the cash obligations shown on the balance sheet. The tax expense on the income statement is an accrual that reflects accounting profit and includes timing differences and non-cash adjustments, not the actual cash outflow. Deferred tax liabilities are non-cash items representing future tax effects from timing differences, not immediate cash payments. The balance sheet tax figure—tax payable and any related tax assets—captures the current cash obligation or credit affecting near-term cash, making it the most appropriate input for OWC forecasting. In short, use the balance sheet tax figure because it aligns with actual cash flow impacts on working capital, unlike the income statement tax expense or deferred tax items.

Operating working capital forecasting focuses on cash movements within the operating cycle, so you should anchor tax impacts to the cash obligations shown on the balance sheet. The tax expense on the income statement is an accrual that reflects accounting profit and includes timing differences and non-cash adjustments, not the actual cash outflow. Deferred tax liabilities are non-cash items representing future tax effects from timing differences, not immediate cash payments. The balance sheet tax figure—tax payable and any related tax assets—captures the current cash obligation or credit affecting near-term cash, making it the most appropriate input for OWC forecasting. In short, use the balance sheet tax figure because it aligns with actual cash flow impacts on working capital, unlike the income statement tax expense or deferred tax items.