Financial Statement Analysis II Flashcards
When certain expenditures result in tax credits that directly reduce taxes, the company will most likely record:
a deferred tax asset.
a deferred tax liability.
no deferred tax asset or liability.
C is correct. Tax credits that directly reduce taxes are a permanent difference, and permanent differences do not give rise to deferred tax.
When accounting standards require recognition of an expense that is not permitted under tax laws, the result is a:
deferred tax liability.
temporary difference.
permanent difference.
C is correct. Accounting items that are not deductible for tax purposes will not be reversed and thus result in permanent differences.
In early 2018, Sanborn Company must pay the tax authority EUR37,000 on the income it earned in 2017. This amount was most likely recorded on the company’s 31 December 2017 financial statements as:
taxes payable.
income tax expense.
a deferred tax liability.
A is correct. The taxes a company must pay in the immediate future are taxes payable.
Using the straight-line method of depreciation for reporting purposes and accelerated depreciation for tax purposes would most likely result in a:
deferred tax asset.
valuation allowance.
temporary difference.
C is correct. Because the differences between tax and financial accounting will correct over time, the resulting deferred tax liability, for which the expense was charged to the income statement but the tax authority has not yet been paid, will be a temporary difference. A valuation allowance would only arise if there was doubt over the company’s ability to earn sufficient income in the future to require paying the tax.
Income tax expense reported on a company’s income statement equals taxes payable, plus the net increase in:
deferred tax assets and deferred tax liabilities.
deferred tax assets, less the net increase in deferred tax liabilities.
deferred tax liabilities, less the net increase in deferred tax assets.
C is correct. Higher reported tax expense relative to taxes paid will increase the deferred tax liability, whereas lower reported tax expense relative to taxes paid increases the deferred tax asset.
Analysts should treat deferred tax liabilities that are expected to reverse as:
equity.
liabilities.
neither liabilities nor equity.
B is correct. If the liability is expected to reverse (and thus require a cash tax payment) the deferred tax represents a future liability.
When accounting standards require an asset to be expensed immediately but tax rules require the item to be capitalized and amortized, the company will most likely record:
a deferred tax asset.
a deferred tax liability.
no deferred tax asset or liability.
A is correct. The capitalization will result in an asset with a positive tax base and zero carrying value. The amortization means the difference is temporary. Because there is a temporary difference on an asset resulting in a higher tax base than carrying value, a deferred tax asset is created.
A company incurs a capital expenditure that may be amortized over five years for accounting purposes, but over four years for tax purposes. The company will most likely record:
a deferred tax asset.
a deferred tax liability.
no deferred tax asset or liability.
B is correct. The difference is temporary, and the tax base will be lower (because of more rapid amortization) than the carrying value of the asset. The result will be a deferred tax liability.
A company receives advance payments from customers that are immediately taxable but will not be recognized for accounting purposes until the company fulfills its obligation. The company will most likely record:
a deferred tax asset.
a deferred tax liability.
no deferred tax asset or liability
A is correct. The advances represent a liability for the company. The carrying value of the liability exceeds the tax base (which is now zero). A deferred tax asset arises when the carrying value of a liability exceeds its tax base.
Which of the following isleast likelya criterion to recognize revenue under US GAAP?
A. Price is determinable.
B. There is evidence of an arrangement between the buyer and the seller.
C. Cash is received.
Answer: C
In order to recognize revenue, the seller should be reasonably sure of collecting money. Receipt of cash isnota requirement for revenue recognition under US GAAP or IFRS.
Which of the following statements regarding the classification of cash flows is not true?
As per U.S. GAAP, interest received is classified as an investing activity.
As per IFRS, interest paid is classified as an operating or a financing activity.
As per U.S. GAAP, dividends paid is classified as a financing activity.
A is not true because As per U.S. GAAP, interest received is classified as an operating activity !
Which of the following items is most likely subtracted from net income when using the indirect method to determine the cash flow from operating activities?
Amortization of intangible assets.
Increase in deferred income tax liability.
Amortization of bond premium.
Amortization of bond premium is a noncash income, and therefore it has to be deducted from net income to arrive at cash from operating activities.
How would an acquisition of a building through only the issuance of shares of common stock be accounted for on the statement of cash flows?
CFI
CFF
Only in disclosures
Answer: C
No actual cash exchanges hands, so it would only be reported in disclosures
Which of the following is not an issue that analysts should consider when examining inventory disclosures?
A. Amount of any write-downs recognized
B. Amount of reversal recognized on any previous write-down for a company using GAAP
C. Description of circumstances that led to a reversal for a company using IFRS
Answer: B
Reversals are only allowed under IFRS !
Which of the following statements is most likely regarding the effects of capitalization on a company’s financial statements?
Capitalization reduces the company’s reported total asset turnover.
Capitalization increases the company’s reported debt-to-assets ratio.
Capitalization decreases the company’s outflows from investing activities.
Capitalization of an expense results in an increase in noncurrent assets, which leads to a decrease in the total asset turnover ratio (sales/assets) and the debt-to-assets ratio (debt/assets).
Capitalization results in a decrease in CFI or an increase in outflows from investing activities.
