Current Assets/Liabilities & DTA/DTL

Question 1

What is a current asset?

Answer 1

Cash plus other assets that are expected to be sold or converted to cash during the current operating cycle

Includes: Demand deposits, cash equivalents, accounts receivable, inventory, pre-paids, and short-term investments

Question 2

What is a current liability?

Answer 2

A liability expected to be paid within 12 months or less

Question 3

How is the Quick Ratio calculated?

Answer 3

(Cash + A/R + Trading Securities) / Current Liabilities

Question 4

How is the Current Ratio calculated?

Answer 4

Currents Assets / Current Liabilities

Question 5

How is Working Capital calculated?

Answer 5

Currents Assets - Current Liabilities

Question 6

How is A/R Turnover calculated?

Answer 6

Credit Sales / Average A/R

Question 7

How is Inventory Turnover calculated?

Answer 7

COGS / Average Inventory

Question 8

How is Day Sales in Inventory calculated?

Answer 8

365 / Inventory Turnover

Question 9

How is Days to Collect A/R calculated?

Answer 9

Average A/R / Average Sales per Day

Question 10

How are gain contingencies recorded?

Answer 10

They are NOT accrued due to Conservatism

Question 11

When are loss contingencies recorded?

Answer 11

If Probable - they are accrued (if estimable) and disclosed

If Reasonably Possible - they are disclosed

If Remote - don’t accrue or disclose

Question 12

What is a temporary difference related to deferred taxes?

Answer 12

GAAP says to recognize a revenue/expense in one period and tax laws say to recognize it in another

Example: Dividends from a subsidiary accounted for using the Equity Method - tax income but not book income

Question 13

What is a deferred tax asset?

Answer 13

Deduction will reduce future income taxes expense.

Question 14

What is a deferred tax liability?

Answer 14

Income will be taxable in a future period and will increase future tax expense

Question 15

Which period’s tax rate is used to calculate a deferred tax asset or liability?

Answer 15

The FUTURE enacted tax rate not the current one.

It is never discounted to present value.

Question 16

What valuation allowance is used with respect to a deferred tax asset?

Answer 16

If it isprobable that not all of a Deferred Tax Asset (debit) will be realized then the Deferred Tax Asset account must be written down (credit) to reflect this

Question 17

What effect do permanent differences have on deferred income taxes?

Answer 17

They have no tax impact.

When calculating the total differences between book and tax income subtract the permanent differences from the total before applying a future enacted tax rate

Question 18

What is deferred income tax expense?

Answer 18

The sum of Net Changes in Deferred Tax Assets and Deferred Tax Liabilities

GAAP Method for calculating is theAsset and Liability Approach

Note: IFRS uses the Liability approach only

Question 19

How are deferred tax assets classified as current or non-current on the balance sheet?

Answer 19

Current Deferred Tax Assets and Liabilities will impact income tax expense within 12 months. All current amounts are netted and reported as a single amount on the Balance Sheet

Non-Current Deferred Tax Assets and Liabilities will impact income tax expense 12 months or more fromt he Balance Sheet Date. All non-current amounts are netted and reported as a single amount on the Balance Sheet