Ch 19

Question 1

Pretax financial income is what?

Answer 1

A financial reporting term and it is referred as income before taxes, income for financial reporting prurposes or income for book poses

Question 2

Pretax financial income is determined according to what?

Answer 2

GAAP

Question 3

How is pretax financial income measured?

Answer 3

With objective of providing useful information to investors and creditors

Question 4

Taxable income (income for tax purposes) is a what?

Answer 4

Tax accounting term.

Question 5

Taxable income indicates what?

Answer 5

Amount used to computer income taxes payable

Question 6

Taxable income is determined according to?

Answer 6

IRC (tax code)

Question 7

Income taxes provide money to support who?

Answer 7

Government operations

Question 8

For financial reporting companies use what?

Answer 8

Accrual method to report revenues

Question 9

For tax purposes companies use

Answer 9

Cash basis

Question 10

Temporary difference

Answer 10

Is the difference between tax basis of an asset or liability and is reported (carrying or book) amount in financial statements which will result in taxable amounts or deductible amounts in future years

Question 11

Taxable amounts increase what?

Answer 11

Taxable income in future years

Question 12

Deductible amounts will decrease what?

Answer 12

Taxable income in future years

Question 13

In company’s GAAP balance sheet, companies recover and settle assets & liabilities at their what?

Answer 13

Reported amounts ( carrying amts)

Question 14

The companies recognize the amount of income taxes that are payable or refundable when they what?

Answer 14

Recover and settle the reported amounts of assets and liabilities retrospectively

Question 15

Deferred tax liabilitity

Answer 15

Is deferred tax consequence attributable to taxable temporary differences

Question 16

A deferred tax liability represents what?

Answer 16

Increase in taxes payable in future years as a result of taxable temporary differences existing at the end of current year

Question 17

Income tax expense has two components

Answer 17

Current tax expense

Deferred tax expense

Question 18

What is current tax expense?

Answer 18

Amount of income taxes payable for period

Question 19

What is deferred tax expense?

Answer 19

Increase in deferred tax liability balance from the beginning to the end of accounting period

Question 20

When there is a difference between book basis and tax basis, what must be done to get deferred tax liability?

Answer 20

The difference times the tax rate

Question 21

Deferred tax asset

Answer 21

Deferred tax consequence attributable to deductible temporary differences

Question 22

A deferred tax asset represents what?

Answer 22

Increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of current year

Question 23

Deferred tax benefit

Answer 23

Results from the increase in the deferred tax asset from the beginning to the end of the accounting period

Question 24

A deferred tax asset should be reduced by valuation allowance if based on available evidence, what?

Answer 24

It is more likely than not that it Will not realize some portion or all of the deferred tax asset

“More likely than not” means a level of likelihood of least slightly more than 50%

Question 25

When a valuation allowance account is established, what is being recognzied?

Answer 25

The reduction in carrying amount of the deferred tax asset.

Question 26

What type of account is the valuation account?

Answer 26

Contra asset

Question 27

Allowance account is evaluated when?

Answer 27

At the end of each accounting period

Question 28

For purposes of accounting recognition these differences are

Answer 28

1. Temporary and 2. Permanent

Question 29

Taxable temporary differences

Answer 29

Temp diff that will result in taxable amounts in future years when related assets are recovered

Question 30

Deductible temporary differences

Answer 30

Temp diff that will result in deductible amounts in future years when related book liabilities are settled

Question 31

Taxable temp differences five rise to recording

Answer 31

Deferred tax liabilities

Question 32

Deductible temp diff give rise to recording

Answer 32

Deferred tax assets

Question 33

A company should prepare a valance sheet for tax purposes that it can compare with its GAAP balance sheet bc

Answer 33

Many differences between two balance sheets are temp differences

Question 34

Originating temporary difference is what

Answer 34

Initial difference between book basis and tax basis of an asset or liability regardless of whether the tax basis of asset or liability exceeds or is exceeded by book basis of asset or liability

Question 35

Reversing difference

Answer 35

Occurs when eliminating a temporary difference that originated in prior periods and then removing related tax effect from deferred tax account

Question 36

Permanent differences result from

Answer 36

Items that

1) enter into pretax financial income but never into taxable income
2) enter into taxable income but never into pretax financial income

Question 37

Permanent differences affect only what?

Answer 37

The period they occur, they do not give rise to future taxable or deductible amounts.

Companies recognize no deferred tax consequences

Question 38

Effective rate differs from enacted rate

Answer 38

True

Question 39

Effective tax rate is computed by

Answer 39

Total income tax expense for the period by pretax financial infome

Question 40

What happens if tax rates are expected to change in the future?

Answer 40

Company should use the enacted tax rate expected to apply.

Company must consider presently enacted changes in tax rate that become effective for a particular future yrs when determine the tax rate to apply to existing temp diff

Question 41

When a change in tax rate is enacted, what should companies do?

Answer 41

Should record its effect on existing deferred income tax accounts immediately

Question 42

The effect is reported as an what?

Answer 42

Adjustment to income tax expense in the period of the change

Question 43

Net operating loss

Answer 43

Occurs for tax purposes in a year when tax deductible expenses exceed taxable revenues

Question 44

When would inequitable tax burden occur?

Answer 44

If companies were taxes during profitable periods without receiving any tax relief during periods of NOL

So fed tax law permit taxpayers to use losses of one year to offset the profits of other yrs

Question 45

Income averaging provision is accomplished through what?

Answer 45

Carry back and carry forward of net op losses

-comp pays no income taxes for a yr in which it incurs a net op loss

Question 46

Loss carry back

Answer 46

A comp may carry NOL back two years and receive refunds for income taxes paid in those yrs

Question 47

In carry back option it may carry forward any loss remaining after

Answer 47

Two year carrying back up to 20 years to offset future taxable income

Question 48

Loss carry forward

Answer 48

Offsets future taxable income for up to 20 yrs.

Question 49

Income tax refundable is reported on

Answer 49

Balance sheet as current asset

Question 50

Companies use carry forwards to offset what?

Answer 50

Future taxable income, the tax effect of a loss carryforward represents future tax savings

Question 51

There should not be diff requirements for recognition of a deferred tax asset from deductible temporary differences and operating loss carryforwards

Answer 51

True

Question 52

Income taxes payable and income tax refund receivable are reported as

Answer 52

Current liability and current asset respectively on balance sheet

Question 53

Deferred tax accounts should be classified as

Answer 53

Net noncurrent amount on balance sheet

Question 54

Net deferred tax asset or net deferred tax liabilities is reported on

Answer 54

Noncurrent section of balance sheet

Question 55

The board decided to classify all deferred taxes as what?

Answer 55

Noncurrent

Question 56

Companies are required to disclose the total of all what?

Answer 56

Deferred tax liabilities

Deferred assets

Total valuation allowance in the notes of financial statements

Question 57

Companies should disclose

Answer 57

1) any change during the year in total valuation allowance
2) types of temporary differences, carryforwards or carry backs that give rise to significant portions of deferred tax liabilities and assets

Question 58

The disclose of gross deferred tax assets, deferred tax liabilities and changes in the valuation allowance helps users to what?

Answer 58

Make better predictions of future cash flows