305 - FINAL Flashcards
Shareholders’ equity (slides)
Think of it as “leftovers” after debts have been paid
1. includes amt. “earned” by comp. for shareholders (RE, reinvested earnings, accum. earnings)
- includes amt. invested by shareholders - contributed capital
- includes adjustment for transactions not included in NI or unrelated to shareholders (Accum. other comp. income AOCI)
- –gain/loss from available for sale sec., postretirement benefits, derivatives, foreign currency translation
primary equity transactions
—issue stock, repurchase stock, issue div., close out NI
CS vs. PS
Common
- -all comps. have - voting rights
- -occasional div. - low div. preference
- -right to aintain ownership
- -residual claim
PS
- -only some comp. - no voting rigts
- -freq. fixed div.
- -high div. preference and higher claim in liquidation
- -hybrid btwn D and E
more expensive for CS with voting rights!!! - diff. classes of common stock and changes price
Par value
- -value stated in corp. charter below which shares of that class cannot be issued
- -no relationship to mkt. value
- -called “stated value” or “nominal value”
- -par value on PS is used to determine the DIV
meaningless today – costco’s par value is .0001
in Noodles IPO ex. – showed comparative BS where common stock inc. by $63K and APIC inc. by 109.1M
- –so estimated total IPO proceeds = 63K + 109.1M = 109.2M
- -then looked at BS to see that IPO proceeds were used to inc. current assets by 2.2M and PPE inc. by 31.3M and debt dec. by 87.4M and stock repurchases!!
GAAP allows 2 diff. acct. methods for share repurchases
- RETIREMENT (cost) method
- -fully retire the shares
- -reduce CS and PIC-CS accounts
- -reduce cash
- -diff. in prices flows through PIC-SR acct. and potentially RE - treasury stock
- -considered temp. reduction
- -reduce shareholders equity and indirectly by putting into temporary contra-equity TS account
- -reduce cash
- –stock is repurchased byt he comp. but not retired - TS is like a holding account that they will use again
- –comp. acquires treasury stock to use in compensation (options, bonuses) or to use in stock div. issuance
dividends and the dates
Not REQ. to pay but becomes a LIABILITY once it is DECLARED
- Date of declaration
–date the board declares div. and comp. RECORDS liab. associated with div.
RE XXX
DIV. Payable. XXX - Date of record
- -stockholders as of this date are recorded and entitled to rec. div. pmt.
- –ex.div. date – to be an owner at date of record, investor must purchase shares before this date (2 days before date of record)
- -NO JOURNAL for either date - date of pmt.
–cash is paid out and recorded
DIV payable XXX
cash XXX
stock splits
ex. corp. has 20,000 shares, $5 par stock with mkt. price of $200 – announce a 2 for 1 stock split
Goal: to reduce the share price to inc. marketability and affordability of the stock
ex. corp. has 20,000 shares, $5 par stock with mkt. price of $200 – announce a 2 for 1 stock split
- –now each has 2 shares of $2.50 par stock for every one prev. owned
- -market price of $100 each
THERE IS NO JOURNAL ENTRY FOR SPLITS
- To dec. mkt. price of stock to attract more investors
- to inc. # shares outsanding
- dec. (split) the par value
effect:
—NO CHANGE in value of corp., va. of total equity or RE
net assets =
“common stock” acct. on BS always held at
shareholders equity (A - L)
par value
characteristics of sole proprietorship and partnership
- ease of formation – few legal formalities
- limited life – esasily terminated – decide by owners to just stop
- unlimited liability
- -proprietor and partnership are personally responsible for all debt – can go after personal assets – no legal separation btwn personal and bus. accounts
Corp. characteristics
- -chartered by the state – ownership by shares of stock
- -separate legal entities - legally distinct from person’s responsible for creation
- -incorporated by state in which they are organizedand subject to that state’s tax laws
- Limited liability (MAJOR BENEFIT)
- -in bankruptcy max loss any stockholder has is thier investment in the comp.
- -protects investors from losses beyond inv. – barrier btwn personal assets
- -under law a corp. is a “person” - easy to transfer ownership – buy/sell shares
- ability to raise large amts. of capital
- doublt taxation (worst downside)
- -corps. are separate legal entities –so taxed independent of owners – so profits paid out in div. are taxed twice
ex. taxable income - 10M and t = 40%
1. corp. income tax = 10M - 4M = 6M
2. income tax on div. = 6M * .4 = 2.4M
- -total income tax = 4M + 2.4M = 6.4M = 64% taxed
- close gov. regulation
- -req. audit and periodic fin. stmts. - less freedom
- -chartered by states so watched by state gov. and fed (SEC) watches
starting corp. and corp. governance
- study state corp. laws
- apply to state official for a charter
- if approved state issues articles of incorporation and gives legal status
corp. governance is through the BOARD OF DIRECTORS
- -elected by shareholders - one is chariman of the board
common stock
–right to vote (elect board) - right to buy shares, right to rec. cash div., right to ownership (residual income) and they are the real owners of the comp.
pref. stock
- -give up some ownership rights for more protection (no vote)
- -fixed cash div. and priority in bankruptcy
- -can be convertible
issuing stock
–par value
Par value - a nominal value assigned to and printed on the face of each share of corp. stock
- -value has nothing to do withmkt. value
- -illegal to issue stock below par value
par value * # shares = company’s “legal capital”
—debit cash and credit equity accts. (CS, APIC, PS)
par value + paid in capital in excess of par = contributed capital
par = min. contributed in bankruptcy shareholders were req. to contribute up to par value – so now make really small
ex. issue 1000 shares with $1 par for va CS $50/share
cash 50,000
CS 10000
paid in capital excess of par, CS. 49,000
if no par value then just do cash and credit common stock
also works for non-cash considerations
ex. issued 5000 shares of $1 par value CS valued at $40 per share for land — reported at FAIR value on dat acquired
Land (5000 * 40). 200,000
CS 5000
APIC, common 195000
accounting for stock repurchases
treasury stock - repurchased shares
- bc mgmt. wants stock for options/bonuses
- thinks stock is undervalued
- wants to stimiluate trading of comp. stock
- remove shares from mkt. to avoid takeover
- wants to inc. EPS reported by dec. # shares
- good use of comp. CF - excess cash
acct. for on COST BASIS = called COST METHOD
- –stock debit at mkt. value on date of repurchase
ex. 100 shares of $1 par value CS reqacuired for $60per share
treasury stock, CS. 6000
cash 6000
if reissue 40 of the 100 rebought shares that were orig. bought for $60 per share reissued at 80 per share
cash (40 * 80) 3200
TS, common (60 * 40) 2400
Paid in capital, TS 800
PAID IN CAPITAL, TS — where report “gains” “losses”
now has balance of 3600 (60 * 60 shares left) in TS ACCOUNT
another equity example
- $40 par PS issued 1000 shares at $45 per share
- $1 par CS issued 1000 shares at $50 per share
- $1 par CS, issued 5000 shares for land with fair mkt. value of $200K
- TS common purchased 100 shares at $60, reissued 40 at 80 and reissed 30 at 40 and reissued 20 at 45
BS equity balance?
- so Pref. stock 40,000
paid in capital in excess of par 5000
—total contributed capital = 45000 - CS 6000 (bc $1 par on 6000 shares)
paid in capital in excess of par = 244,000
—total contributed capital = 250,000 - TS 6000
cash 6000
100 shares - 40 - 30 - 20 = 10 left at 60 = 600 TS balance
so equity on BS = 250,000 - 600 + 100,000 RE = 394,400 BS equity balance
Retained earnings
portion of corp. owner’s equity that have been EARED from PROFITABLE OPERATIONS and NOT distribued to stockholders
RE DOES NOT = CASH!!!!!!!!
- –RE can be really big if sum. amt. of NI they have made that has not been paid out as div.
- -cash = an asset - cash balance on a certain date
- -RE = cumulative earnings that have been retained since start of business - one source of cash
- -comp. can have large RE and have NO cash
RE T acount ----Credit Beg. balance --less div. for year --less net LOSS for year \+ NI for year = end credit balance
if has a debit balance – then have a cumulative loss for several years (-NI)
although both cash and RE can move in same direction
- NI —> inc. RE –> and NI is accrual based, not cash based
- cash from earnings –> invested in productive assets (PP&E, Inventory) or used to pay off loans – not put in as cash
cash dividends
why do comps. pay them? – reg. CFs to investors? signal of fin. strength?
- stable comps pay large portion of income as div. – growing comps. pay small portion
- comps. are cautious about amt. bc large div. sets expectations for future div. amts. – but also interpret is as bad news if div. amt. dec. for duture div. pmts.
pmts. made on a PRO RATA BASIS – each owner rec. proportion based on ownership %
should comp. pay dividends??
- -could reinvest isntead
- -if they don’t they inc. RE – inc. future profits, growth and inc. price per share
accounting for cash dividends
three imp. dates
1. declaration date - when board of directors formally declares intent to pay div. and becomes LEGALLY OBLIGATED
dividends 8000
div. payable 8000
at yr. end when close out div. acct.
RE 8000
div. 8000
date of record 1/5 and paid 1/20 — btwn 1/5 and 1/20 if stocks trade, anyone who buys within 15 day period will not rec. dividend
another method is to debit straight to RE but better to put in temp. div. acct. bc can keep track of CS/PS div.
- date of record – btwn. declaration and pmt. date - name list – date set by board on which stockholders record are identified as those who will rec. div.
- -no journal entry - pmt. date – sending the cash
div. payable. 8000
cash 8000
dec. div. amt. = dec. share price
- -announcing large div. = inc. share price bc indiccates growth and future high pmts. - high expectations
div. preferences
when cash div. are declared by comp. with both PS and CS — Now allocated to 2 inv. classes and determined by rights of PS holders
2 diff. preferences in PS
- current div. preference
- -right to rec. current div. before CS holders – rec. div. as 5% of par ($2 in ex.)
- -PS has div. % with it —> (“5% preferred, $40 par value stock, 1000 shares outstanding)
- –the % is fixed – so behaves like int. pmts.
- -CURRENT DIV. PREF. = they rec. their % of par value before CS holders rec. any div. - cumulative div pref. –means if a certain year a comp. didn’t have any cash to pay div. — then next year (or next 5 years) later they have to pay prev. PS shares + current year before CS gets any of it
- –right to rec. current div. + DIV IN ARREARS before CS rec. any
- -but COMPS. are not req. to pay div. – amt. past unaid div. = div. in arrears
- -div. in arrears are not a liab. — only become an obligation if comp. reports/declares div. for following year —< instead reported in fin. stmt. notes
ex. with PS div.
PS: 5% $40 par value —> 1000 shares issued and oustanding
CS: $1 par value, 6000 shares issued, 5,990 oustanding
$40 * .05 = $2 per share PS * 1000 shares = 2000 pref. div.
- non-cum. no arrear div. = 1500 —> means PS gets 1500. and CS gets 0
- non-cum. and no arrear – div. = 3000 –> means PS gets 2000 and CS gets 1000
- cum and 2 years arrear – div. = 5000 —> means PS gets 5000 (bc owed 6000) and CS gets 0
- cum. and 2 year arrear – div. = 11,000 —> so PS gets 6000 and CS gets 5000
in last ex. (4) --- journal entries
date of declaration
div., PS 6000
div., CS 5000
div. payable 11,000
date of pmt.
div. payable. 11000
cash 11000
other items on IS
- other rev. and exp.
- extraordinary items
- discontinued operations
- other rev. and exp.
- –items incurred or earned from activities outside of normal operations of comp.
- –ex. manufacturing comp. rec. div. from inv. in stock of another firm
- -distinguish btwn operating rev. and other
- -or gains/losses from sale of assets - extraordinary items
- -used to report special non-operating gains/losses that are unusual infrequent, material in amt.
- -rare gains/losses from floods/fires
- -most COMMON is extraordinar gain –buying comp. for LESS than va of its identifiable assets - discontinued operations
- -in ex.yr. 2010 orig. sales nad costs reported – then 2011 cumulative stmts. showed diff. amts. for 2010 – bc if decide to discont. any form of operations – we remove impact from books – so fwd. looking
EPS
reported as EPS = earnings / # shares outstanding
BASIC EPS – based on historical info. – straight fwd. calc. of rpeorted NI and # shares outstanding during year
diluted EPS – considers stock stransactions that might happen in future
simple ex. basic EPS = 300,000 / 100,000 oustanding = $3 per share
diluted - have 50,000 stock options that could be exercised
= 300,000 / (100,000 + 50,000) = $2 per share
EPS
makes comparable - btwns comps. are years
- –EPS = how mch shareholder would get if comp. were to pay out all earnings in form od fiv.
- -reported on FACE of IS
BASIC = NI - pref. div. / weighted avg. of common stock oustanding
pref. div.
1. cumulative – no matter what you take it out whether declared or not
2. non-cumulative – youtake out only if declared
the weighted avg. common stock oustanding ex. 1/1 - 100,000 CS outstanding 4/1 80000 shares issued 7/1 10% stock dividend 9/1 18,000 treasury stock repurchased 12/31 2 for 1 stock split HAPPENS RETROACTIVE OVER TIME
1/1 = 100,000 shares
4/1 = 80000 * 9/12 of yr. = 60,000 shares
7/1 = 10% * 160,000 = 16,000 stock div.
9/1 18,000 treasury stock * (4/12 left of yr.) = -6000
—current total = 160,000 + 16,000 - 6000 = 170,000
12/31 2 for 1 stock split
—doubles so now have weighted avg. 340,000
NI - pref. div. / 340,000 = BASIC EPS
stock options
reported at FAIR VALUE – usually declared at current stock price
BASIC EPS = claim common shareholders have on NI of comp.
–diluted EPS = mix of D and E and Hybrid
EPS more video practice
want to find the earnings attributable to COMMON shareholders
- stock options
- –only changes the denominator — (# shares options - # treasury stock) — added to denominator - convertible PS
- –in numerator add back the pref. div.
- –deomintaor add # shares that would result from conversion - convertible debt
- –numerator – add back AFTER TAX int. exp.
- –denominator - add # shares if converted
but if any have anti-dilutive effects we don’t include in calc. of diluted EPS — if for ex. makes EPS greater than basic EPS then not dilutive and ignore
excel ex. with diluted EPS
options outsanding 30,000
acg. K = 35
avg. stock price = 55
- -so if exercised the options proceeds are 35 * 30,000 = 1050000 –assume comp. uses to repurchase shares
1050000 / 55 = can buy back 19,091 shares
net shares if converted = 30,000 - 19091 = 10,909
2500000 NI - 200000 PS div. / (1,100000 shares outstanding + 10,909) = $2.07 diluted EPS
diluted EPS with convertible BONDS
bonds payable 5000 face 4% – convertes to 10 share each with value of $2M
–NI = 500,000 and weighted avg. common = 400,000 t = 35%
5000 * .04 * 400 bonds = 80,000
—so after tax interest = 80000 * (1-.35) = 52000
numerator = 500000 + 52,000 = 552,000
denominator = 400,000 wtd. avg. shares + (400 bonds * 10 shares) = 404,000
552,000 / 404,000 = 1.37 diluted EPS
basic = 500,000 NI / 400,000 = 1.25
–so above diluted is anti-dilutive so ignore
ex. 2 – bonds payable 5000 with face 4% and convertes to 200 shares each – NI = 500,000 and t = 35%
BASIC EPS = 1.25
diluted = (500000 + 80000*(1-.35)) / (400,000 + (400 * 200 shares) = 1.15 diluted EPS
EPS
measures to ensure EPS is reported accurately and comparable
–it is the # that is reported most freq. in the media
BASIC EPS = NI - pref. div. / wtd. avg. oustanding shares CS
pref. div. = pref. shares * par value * div. %
splits and div. treated RETROACTIVELY – so all shares oustanding PRIOR TO stock div./split are adjusted
–for comparative income stmts. – prior year EPS should also be adjusted to reflect stock split/div.
wtd. avg. shares also adjusted by treasury stock — which TS should also be weighted by # months shares were held in treasury
AOCI is reported in the
foreign currency translation adjustments affect NI T/F
equity section of BS
false
stock based compensation
- restricted stock plans
- stock option plans
almost 50% (47%) of comps. paid compensation in form of stock
–15% in form of options
- restricted stock plans: firm gives employees actual shares of its stock (but with restrictions)
- stock option plans: firm gives employees OPTION to purchase shares
from acct. perspective - have to decide when to report compensation exp. and how much
restricted stock
plans tied to CONT. employment of person rec. award
- -if employee leaves the firm, shares are forfeited
- -“restricted” from selling stock for specified nmber of years
compensation exp. = mkt. price at GRANT DATE * # restricted shares granted
–amt. is accrued on SL basis as compensation exp. over restricted period (vesting period)
ex. RSU
ex. grants 4M shares at $1 par common stock to employees under RSU plan 1/1/17 – vesting period is 3 years
- -shares currently trading at $6 on NYSE
- grant date = NO JOURNAL ENTRY – compute total comp. exp at fair value (mkt. price * number shares)
- over the vesting/service period
- -record ann. comp. exp. SL over period
- -record in a temp. PIC-RSU account - vesting date
- -remove PIC-RSU temp. acct. and record share issuance (CS and PIC-CS)
shows measured compensation exp. at FAIR VALUE!!!!
example!!!
1. grant date = NO JOURNAL ENTRY
4M shares * $6 = 24M fair value / 3 years = $8M each year
- on 12/31/17, 18, and 19 record
comp. exp. 8M
PIC, RSU. 8M - vesting date 12/31/19
PIC, RSU 24M
CS 4M
PIC, CS 20M
stock options
- grant date - NO JOURNAL ENTRY - but find total comp. exp. at fair value
- over vesting period — record ann. comp. exp. - SL over period into temp. PIC-Options acct.
- vesting date = NO ENTRY – final ann. comp. exp.
- during exercise period until expiration date
- –if EXERCISED - record cash inflow, remove PIC-options balance and record share issuance of CS and PIC-CS
- –if EXPIRE — remove PIC-options and move to PIC-exp. options
options practice!!!
- -on 1/1/17 granted 25M options to purchase shares of $1 par CS within next 6 years —but have to vest until 12/31/19 (3 years)
- -comp. assumes 10% forfeiture rate
- -strike = 10 = mtk. price at grant
- -fair value of options is $3
total compensation costs related to options
= 25M shares * 3 fair value = 75M
75M * .9 = 67.5 (that will actually go through bc 10% forfeit rate so only 90% go through)
67.5 / 3 years = 22.5 comp. exp. per year
so each year JE
comp. exp. 22.5M
PIC-options. 22.5M
options ex. 2
1/1/17 - options to purchase 12M shares at $1 par CS for next 6 years – but 3 year vesting
–strike - 17 — value = $5 - no forfeitures anticipated
- on 4/3/20 – when mkt. price = 19 per share – all options exercised - what is jounral entry
- not if all options were not exercised but alowed to expire - JE
grant date = know comp. exp. will be 5 * 12M = 60M / 3 years = 20 M each year
–so added to the PIC-Options account
- on 4/3/20 exercised – so 19 price and exerised for 17
cash (12 * 17). 205M
PIC-options 60M
CS at par 12M
PIC-CS(acts as plug)252M
at expiration - JE
PIC-Options 60M
PIC-expired options 60M
diluted EPS
= basic EPS formula - (impact of options, rights and warrants) - (impact of convertibles) - (impact of RSUs)
dilutive potential CS = shares issuable upon exercise of stock options and upon vesting of RSUs
dilution for options, rights and warrants
ex. 2016 Beena has 10M CS options oustanding with strike 15 - avg. mkt. price was 25
ex. 2 – NI = 720,000 for year
- –80000 shares CS oustanding throughout year
- -24,000 incentive stock options – each K = 37.5
- -avg. mkt. price for CS = 45
- -on 8/30 sold 15,000 CS
- calc. EPS as IF all are IN THE MONEY
- -assume options were exercised at beg. of year
- -options have DENOMINATOR impact only
treasury stock method – assumes proceeds from exercise of options are used to purchase treasury shares at avg. mkt. price for period
ex.
–exercise = 10M options * 15 = 150M
150M / 25 mkt. price - 6M shares reqacuiqred
–so changes diluted EPS denominator by (10M options - 6M repurchased) = 4M
so take wtd. avg. and add 4M shares to it
ex. 2
basic ES = 720,000 / (80000 + 5000) = 8.47 per share
diluted — exercise options - 24000 * 37.5 = 900,000 / 45 = 20,000 repurchased
—so 24000 - 20000 = 4000
diluted = 720,000 / (80,000 + 5000 + 4000) = 8.09 per share
vesting options
if not fully vested (ex. years 2 through 5 of vesting period = 40% vested)
–so we would include 60% of total compensation exp. in the “proceeds”
if ACTUAL exercise of options
–in both basic and diluted EPS we would add weighted time of shares to the wtd. avg.
dilutive convertible securities
calc. EPS if all securities (Debt or equity) were converted into shares of CS
- -called “if converted method”
convertible PS
- -inc. numberator by adding back pref. dividends
- -inc. denominator by number of common shares that would result from conversion
convertible debt
- -inc. numerator by adding back AFTER TAX int. exp.
- -inc. denominator by number of CS that would result from conversion
convertible PS example
–5M shares oustanding of 7%< $10 par, pref. stock (cumulative) which can be converted into 4M shares
convertible debt securities
–10%, $5M face amt. bonds oustanding which are convertible into 2M shares CS - tax rate = 40%
PS
1. numerator = add back div. pref. – so ignore div. pref. in BASIC EPS part
- Inc. denominator by 4M
Debt
- inc. numerator by 5M * .1 * (1-t) = 300,000 add to numerator
- -inc. denominator by 2M
ex. issued 75,000 8% par bonds which were convertible into 7500 shares of CS
- -rev = 17500, exp = 8400, tax = 40%
- -wtd. avg. shares = 2000
have to calc. NI
int. exp = 75000 * .08 = 6000
17500 - 8400 - 6000 - tax = 1860
after tax int. exp = 6000 * .6 = 3600
(1860 + 3600) / (2000 + 7500) = .57 per share
in IB
- basic shares oustanding
- in the money options
- in the money convertible securities
- use from most recent 10K or 10Q
- use treasury stock method
- use if converted method
diluted EPS - restricted stock
also use treasury stock method — denomintaor inc. by diff. btwn RSUs and number of shares that can be bough back with “proceeds” at avg. mkt. price of comp. during year
- -UNVESTED restricted stock are included in hypothetical EPS calc.
- -fully vested shares are distributed and oustanding
deominator effect only
—proceeds for EPS calc. include TOTAL COMP. FROM UNVESTED RESTRICTED STOCK NOT YET EXPENSED!!!!!!
ex. RSU diluted EPS
grants 5M RSUs of its $1 par CS on 1/1/18 — subjet to forgeiture if employee quits within 3 years – avg. mkt. price of $12 per share
- total and ann. comp. exp.
5M shares * $12 = $60M / 4 years = $15M/ year
dilution adjust every year
2018
60M - 15M already expensed from 2018 = 45M remaining “proceeds”
45M / $12/share avg. price = 3.75M shares
so in 2018 EPS no change to numerator but denominator = 5M - 3.75M = 1.25M add to weighted avg.
2019
60M total - 30M already expensed in 18/19
= 30M remaining / 12 avg. price
= 2.5M shares
5M - 2.5M = 2.5M shares added to wtd. avg. denominator - no change in numerator
negative EPS
sometimes report Neg. EPS or loss per share
- –careful when determining dilutive or anti-dilutive
- -bc options will dec. the loss per share which will actually make it less negative – whih is anti-dilutive - so should be ignored
statutory tax rate
effective tax rate
marginal tax rate
statutory tax rate
–currenly enacted corp. tax rate as req. by internal rev. code
effective tax rate --measure current tax burden faced by firm = total tax exp. / pretax income in 10-K --or cash tax paid / pretax income --going down over time!!
marginal tax rate = PV of current and deferred income taxes to be paid per dollar of additional taxable income
fin. reportig vs. tax reporting
fin. reporting
- -GAAP is set of rules for preparing fin. stmts.
- -rule makers: FASB
- -goals: comparability, reliaiblity, consistency
- -uses FULL ACCRUAL method
tax reporting
- -internal rev. code sets rules for preparing tax returns
- -rule makers: congress
- -goals: rev., social welfare, taxpayer behavior
- -uses modified cash basis
rev. diff.
exp = deductions and also diff.
pretax income = taxable income
tax exp. = actual taxes paid
book-tax differences
permanent differences
- -the accounting number will never apear on tax return or vice versa
- -inc. or dec. ETR by decreasing or increasing pre-tax income
temporary differences
- -timing diff. btwn when number hits fin. stmts. vs. tax return
- -creates deferred tax assets (future tax decuctions) and deferred tax liabilities
tax ex. ABC comp. buys snowplow truck for $100,000 with useful life 5 years
–generates 44,000 a year in rev. and pays 30% taxes - no other expenses than deprec.
- -what is derec. exp. for book/tax?
- -what is oretax income for book/tax?
- -what is NI for book/tax?
- -what is RE for book/tax?
100,000 / 5 years = 20,000 each year
rev. = (44,000 - 20,000) * .7 = 16,800 – each year under GAAP same!!!!
but tax accounting uses MACRS!!!!! So deprec. exp. diff. – BV diff. so NI diff.
Income stmt. very diff. under tax accounting to IRC bc uses MACRS!!
but when some up the tax payble and tax exp = they are both after 5 years = to 36,000!!!!!! so same amt. of total taxes paid — just diff. timing
—so TEMP. book-tax differences bc relate to timing of depreciation and therefore tax liability!!!!
shows that tax exp. reported in IS is NOT amt. of cash taxes actually paid
book tax differences calc.
take the ann. book deprec. - the ann. tax deprec. and that = book tax diff.
ex. year 1: 20,000 book - 35,000 tax = (15,000) diff.
(15,000) * .3 tax rate = 4500 deferred tax liability
year 2: 20000 book - 30000 tax = (10,000)
10000 * .3 = 3000 and add to prev. year so 4500 + 3000 = 7500 deferred tax liab.
3: 20000 book - 15000 tax = diff. of 5000
5000 * .3 = 1500 positive so when you add t the nagative 7500 = 6000
eventually always will = 0
total tax exp. - tax payable = diff. btwn them
deferred tax aset DTA
common reported if has future tax benefit (a future deduction)
ex. of permanent tax diferences
income that is never taxed
–income from municipal bonds - life insurance from death - portion of div. from other companies
expenses that are never deducted for tax purposes
–political contributions - prem. paid for life insnurance policies of key executives - pmts. and fines due to law violations
tax credits/deductions
–targeted jobs credits (hiring veterans, former convicts, R&D credits, domestic manufacturing deduction)
permanent diff. IMPACT YOUR FIN. INCOME SUBJECT TO TAX
–so you get your pre-tax fin. income and add back these permanent changes to get the fin. income subejct to cash (95,000 to 100,000)
pretax fin. income fin. income subject to tax taxableincome total tax exo current tax exp deferred tax exp NI effective tax rate
pretax fin. income
= rev. - exp. from books
fin. income subject to tax
= pretax fin. income adjust for permanent diff.
taxable income
= fin. income subject to tax adjusted for temp. differences
total tax exp
= fin. income subject to tax * statutory rate
current tax exp
= taxable income ( statutory rate
deferred tax exp
= temp. diff. ( rate = total tax exp - current tax exp
NI
= pretax income - total tax exp
effective tax rate
= total tax exp / pretax fin. income
