Investments, Statement of Cash Flows, and Income Taxes

Question 1

What should be excluded when calculating current income tax liability?

Answer 1

Tax exempt/permanent amounts

These amounts do not affect the taxable income calculation.

Question 2

What should be added or decreased in the calculation of temporary differences?

Answer 2

Temporary differences

These differences arise between the tax and accounting treatment of income and expenses.

Question 3

When is rent considered taxable?

Answer 3

When received

This is an example of a temporary difference in tax accounting.

Question 4

What rate should be used for interim period tax expense?

Answer 4

Estimated annual effective rate

This estimate helps in allocating tax expense over interim periods.

Question 5

What does net cash from investing include?

Answer 5

AFS and HTM

AFS refers to Available-for-Sale securities, and HTM refers to Held-to-Maturity securities.

Question 6

What should not be recognized in the period when CF a Loss?

Answer 6

Net income

This applies when there is a Net Operating Loss (NOL).

Question 7

What are examples of cash flow finance activities?

Answer 7

• Dividends paid
• Proceeds from Stock
• Proceeds from Bonds
• Proceeds from LOC

LOC refers to Lines of Credit.

Question 8

What must be eliminated regarding unrealized intercompany profit?

Answer 8

Unrealized interco profit. Look at Difference of inventory by parent and sub, minus consolidated

This is necessary for accurate consolidated financial statements.

Question 9

What is not subject to the application of intraperiod income tax application?

Answer 9

Operating income

This refers to the income generated from core business operations.

Question 10

How is unrealized gain on AFS recorded?

Answer 10

Other Comprehensive Income (OCI)

This reflects changes in fair value that are not recognized in net income.

Question 11

What must be disclosed for financial instruments?

Answer 11

Carrying Value (CV) and Fair Value (FV)

This disclosure provides insights into the valuation of financial instruments.

Question 12

If a company records a Deferred tax asset, Financial income must be

Answer 12

Less than taxable income

Question 13

Presuming the relevant taxing authority will examine the tax position is an element of

Answer 13

the two step approach to recognizing tax benefits and is not an example of a tax position

Question 14

If a company records a Deferred tax Liability, Financial income must be

Answer 14

More than taxable income

Question 15

NOL is limited to what % of Taxable income 2021 and beyond

Answer 15

80%

Question 16

Any goodwill created in an investment accounted for under the equity method is

Answer 16

Ignored. It is neither amortized nor tested for impairment. The entire investment (using the equity method) is subject to the impairment test.

Question 17

Effective tax rate

Answer 17

Income tax expense / Pretax income

Question 18

Is goodwill amortized?

Answer 18

No

Question 19

What is the impact of a dividends payment for equity method?

Answer 19

The dividends received reduce the investment account, but do not affect the income.

Question 20

Income tax expense

Answer 20

Taxable income × Tax rate

Question 21

Establish deferred tax using enacted annual tax rate

Answer 21

when temporary differences (will) reverse

Question 22

How would you calculate year 2 deferred tax expense, given year 1 temporary differences?

Answer 22

Calculate year 2 by using enacted rate vs temporary, then subtracting year 1 temporary * PY enacted rate

Question 23

Operating cash flow calculation-Adjustments to Net income

Answer 23

Depreciation, Amortization, Impairment, Gain on sale of PPE, provision for losses on AR

Question 24

Total Income Tax Expense

Answer 24

Deferred Tax + Income Tax expense(Current)

Question 25

How to record a dividend received from a stock investment under the two methods(FV and equity) and Liquidating dividend

Answer 25

under the fair value method, receipt of a dividend is recorded as income and does not affect the investment account. Under the equity method, receipt of a dividend is recorded as a decrease in the investment account.(Liquidating treated the same way)

Question 26

Avoidable interest

Answer 26

The amount of avoidable interest is the interest that would not have been incurred if the construction project had not taken place(Avoidable=interest on borrowings + interest on construction note)

Question 27

Avoidable interest calculation example

Answer 27

(Total WAAE less construction note Funds)=Other Borrowings used for construction WA interest rate on other borrowings= (Interest dollars/Total borrowings) Interest on Borrowings used for Construction=(WA interest rate * other borrowing) Avoidable=interest on borrowings + interest on construction note

Question 28

Credit Loss

Answer 28

Difference between the PV and the Amortized cost

Question 29

Accounting for Asset FV differences

Answer 29

Excess over Book Value is amortized over the life(excluding land). Net income will decrease

Question 30

Unrealized gains and losses resulting from changes in the value of debt securities when there is no deemed impairment receive no accounting treatment.

Answer 30

Held-to-maturity securities

Question 31

Operating Cash Flow

Answer 31

Net Income Non Cash expenses/losses + Non Cash income/gain - Increase/Decreases in operating liabilities/assets + Increase/Decreases in operating assets/liabilites -

Question 32

Non Cash Investing and Financing activities

Answer 32

EX Conversion of bond to equity Exchange of Non Cash for another non cash Acquiring the lease obligation Purchase of FA by issuance of stock

Question 33

Does the CL show up on the income statement if the company has the option to sell the AFS for a gain?

Answer 33

No. FV- AC =unrealized gain is recorded in OCI

Question 34

IF CL exceeds the FV adjustment, the CL recorded on the income statement is equal to____

Answer 34

FV adjustment

Question 35

AFS Debt security Credit loss=

Answer 35

Difference between Amortized Cost and PV