Financial Reporting & Analysis Flashcards
(81 cards)
Income Tax Expense
expense recognized in the income statement that includes taxes payable and changes in deferred tax assets and liabilities (DTA and DTL)
Income Tax Expense = taxes payable + Change in DTL - Change in DTA
Valuation Allowance
Reduction of deferred tax assets based on the likelihood the assets will not be realized. A contra account. If circumstances change, the DTA can be increased by reducing the valuation allowance
Tax Loss Carryforward
A current or past loss that can be used to reduce taxable income (thus taxes payable) in the future. Can result in a deferred tax asset
Differences between the treatment of an accounting item for tax reporting and for financial reporting can occur when….
timing of revenue and expense recognition in the income statement and the tax return differ
Certain revenues and expenses are recognized in the income statement but never on the tax return (or vice-versa)
Assets and / or liabilities have diffe
Deferred Tax Liability
Created when income tax expense is greater than taxes payable (tax return) due to temporary differences. Most common way they are created is through different depreciation methods
Deferred Tax Asset
Created when taxes payable (tax return) are greater than income tax expense due to temporary differences. Post employment benefits, warranty expenses, and tax loss carryforwards are typical causes of deferred tax assets
Tax Base
The amount that will be deducted on the tax return in the future as the economic benefits of the asset are realized
If deferred tax liabilities are expected to reverse in the future, they are best classified by an analyst as a ______
Liability
If the deferred tax liability is not expected to reverse in the future, they are best classified as ______
Equity (DTL decreased and equity increased by the same amount)
Carrying Value
Value of the asset reported on the financial statements, net of depreciation and amortization
DTL and DTA values on the balance sheet must be changed because _____
the new tax rate is expected to be in force when the associated reversals occur.
Permanent Difference
A difference between taxable income and pretax income that will not reverse in the future. It is caused by revenue that is not taxable, expenses that are not deductible, or tax credits that result in a direct reduction in taxes.
Permanent differences will cause the firm’s effective tax rate to differ from the statutory tax rate
Statutory Tax Rate
The tax rate of the jurisdiction where the firm operates
According to US GAAP, if it is more likely than not that some or all of a DTA will not be realized then the DTA _____
Must be reduced by a valuation allowance
Impairments (deferred tax asset)
Generally result in a deferred tax asset since the writedown is recognized immediately in the income statement but the deduction on the tax return is generally not allowed until the asset is sold or disposed of
Restructuring (deferred tax asset)
Generates a deferred tax asset because the costs are recognized for financial reporting purposes when the restructuring is announced, but not deducted for tax purposes until it is actually paid
Information flows through an accounting system in four steps, they are ….
- Journal entries - record every transaction
- General Ledger - sorts the entries in the general journal by account
- Initial trial balance at the end of the accounting period
- Present account balances from the adjusted trial balance in the financial statements
Accounting Equation
Assets = Liabilities + Equity
Assets = Liabilities + contributed capital + retained earnings
Assets = liabilities + contributed capital + beginning retained earnings + revenue - expenses - dividends
Form 144
A company can issue securities to certain qualified buyers without registering the securities with the SEC but must notify the SEC that it intends to do so
Form 3,4,5
involve the beneficial ownership of securities by a company’s officers and directors. Analysts can use these filings to learn about purchases and sales of company securities by corporate insiders
International Organization of Securities Commissions (OSCO)
Three objectives - protect investors, ensure the fairness, efficiency, and transparency of markets and reduce systemic risk
Two fundamental characteristics that make financial statements useful
Relevance and faithful representation
Four characteristics that enhance relevance and faithful representation
Comparability, verifiability, timeliness, and understandability
Two important underlying assumptions of financial statements
accrual accounting and going concern
