Ch 2 FS, CF, Taxes Flashcards
2 types of fixed assets
tangible fixed assets
intangible fixed assets
what are fixed assets
long term assets
intangible long term assets
trademarks or patents
synonym for fixed assets
capital assets
long term liability
opposite of current liability
Why does A-L=SE
If all the liabilities were paid off, whatever remains in the fir is shareholders equity!!!!
what is net working capital
current assets- current liabilities
what are the two dimensions of liquidity
ease of conversion vs loss of value
HIGHLY LIQUID ASSETS: sold fast w low loss of assets
ILLIQUID ASSETS: sold fast w lots of loss of asset value
ANYTHING can be liquid when if you cut the price fast enough
is it more profitable to hold liquid assets or illiquid assets
illiquid assets: cuz they generate some value
highly liquid assets like cash dont generate revenue
what is financial leverage
the use of debt in a firms capital structure (makeup)
what requires more frequent revaluations?
ppe who’s value is subject to change and is unpredicatable
what is market value
price which buyers/sellers trade the assets
if market value ««< book value
««<= relallly reallllly below
then you have to do write downs
does canadain gaap or ifrs perment reversal of impairment losses (upward revaluations)
IFRS
Earnings per share memaning
net income expressed on a per-share basis
net income/shares
what is matching principle
revenues should be related to expenses
why do we care about the socf
because it adds back non cash expenses!!
accounting is not the same as cash flow!
what is the cash flow identity
-derived from
-formula
a=l+se
cash from assets= cash to liabilities (bond holders)+ cash to shareholders
Cash flow from assets components
+ formula
operating cf: cf from daily operations
capital spending: net spending on FIXED ASSETS( long term) [purchases of fixed-sales of fixed]
additions to net working capital: change in nwc
OPERATING CF- NET CAPITAL SPENDING- CHANGES IN NWC
Formula for operating cash flow
EBIT+Depreciation - Taxes
Accounting defition of operating cash flow vs finance def of operating cash flow
acct: net income+ depreciaiton
->interest is deducted in calculations
fnce: ebit+depreciation-taxes
->interest not deducted
Capital spending formula
ending fixed assets -beginning fixed assets+ depereciation
change in net working capital formula
ending nwc- beginning nwc
!!!!!!!!!!!!! IMPORTANT !!!!!!!!!!!!!1
FREE CASH FLOW IS THE SAME AS — IN THIS COURSE
cash flow from assets
Cash flow to/from creditors (liabilitiyes)
interest paid- net new borrowing
Cash flow to shareholders
dividends - net new equity rrraised
How to check if you calcuallted cash flow to bondholders/creditors and shareholders correctly
see if the cash flow identity is true
Should operating cf be pos
yes! usually
can total cf from assets be negatives?
yes if the firm is growing!!!
why are taxes important
cash flows are measured after taxes
3 features of ideal tax law
- tax burden equally distribute
- taes should not change efficient allocation of resources by market
- easy to adminster syste
What do invidiual tax rates apply to?
-income from imploments
-unicorporated business
-investment income
How do tax brackets work
for the income that is left over into the next bracket, it is taxed!! not the whole amount just whatever seeps into the next bracket
how are tax rates combined?
federal tax rate + provincial tax rate
Average tax rate vs marginal tax rate
avg tax rate: tax bill/ taxable income; HOW MUCH OF YOUR INCOME GOES TO PAY TAXES
marginal tax rate: extra tax you would pay if you earned one more dollar in higher bracket
which tax rate is important to make decisions and why
marginal tax rate because i concerns the potential new portion of cash flows
When investor holds stocks, they face two taxes (dividend taxation and on capital gains),
What does the dividend tax credit apply to?
only dividendds paid by canadian companies (encouraages canadian investors to support canada bc less taxes paid from dividednds)
this is basically a tax formula reducing tax rate on dividends recieved by stock holders who hold stock in canadian companies
Individual Canadian investors also benefit from a tax reduction for capital gains. Capital gains arise
when an investment increases in value above its purchase price. For capital gains, taxes apply at 50% of
the applicable marginal rate. For example, individuals in Newfoundland in the highest bracket in
In practice, capital gains are lightly taxed because individuals pay taxes on realized capital gains only
when stock is sold. As many individuals hold shares for a long time (they have unrealized capital gains),
the time value of money dramatically reduces the effective tax rate on capital gains. Also, investors can
manage capital gain realization to offset losses in many cases.
How are corporate taxes managed
-higher prices for consumers
-low wage to workers
-low returns for investors
taxable income
In Section 2.2 we discussed the statement of comprehensive income for Canadian Tire Corporation
Limited ( Table 2.2); it includes both dividends and interest paid. An important difference is that
2020 M&20P21 and Beyond 2020 2021 and Beyond
Income
Inv estment
Income
2020 2021 and Beyond 2020 2021 and Beyond
Federal rates
General corporate rate 38.0% 38.0% 38.0% 38.0%
Federal abatement (10.0)
28.0
(10.0)
28.0
(10.0)
28.0
(10.0)
28.0
M&P deduction (13.0) (13.0) 0.0 0.0
Refundable Tax 0.0 0.0 10.7 10.7
15.0 15.0 38.7 38.7
Provincial rates
British Columbia 12.0% 12.0% 12.0% 12.0%
Alberta 10.0 9.0/8.0 10.0 9.0/8.0
Saskatchewan 10.0 10.0 12.0 12.0
Manitoba 12.0 12.0 12.0 12.0
Ontario 10.0 10.0 11.5 11.5
Quebec 11.5 11.5 11.5 11.5
NewBrunswick 14.0 14.0 14.0 14.0
Nova Scotia 16.0/14.0 14.0 16.0/14.0 14.0
Prince Edward Island 16.0 16.0 16.0 16.0
Newfoundland and Labrador 15.0 15.0 15.0 15.0
Curre nt a s of July 31, 2020
Refer to notes on the following pages.
All rates must be prorated for taxation years that straddle the effective date of the rate changes. The tax rates in this table reflect federal and provincial
income tax rate changes that were substantively enacted as at July 31, 2020.
Source: KPMG, “Tax Facts 2020-2021” Accessed at https://assets.kpmg/content/dam/kpmg/ca/pdf/2020/07/tax-facts-2020-2021.pdf. Current as of July 31,
2020.
b c
d
interest paid is deducted from EBIT in calculating income but dividends paid are not. Since interest is a
tax-deductible expense, debt financing has a tax advantage over financing with common shares. To
illustrate, Table 2.2 shows that Canadian Tire paid $288.1 million in taxes on taxable Page 52 income
of $1,182.9 million. The firm’s tax rate is $288.1/1,182.9 = 24.36%. This means that to pay another
$1 in dividends, Canadian Tire must increase EBIT by $1.32. Of the marginal $1.32 EBIT, 24.36%, or
32 cents, goes in taxes, leaving $1 to increase dividends. In general, a taxable firm must earn 1/(1 − Tax
rate) in additional EBIT for each extra dollar of dividends. Because interest is tax deductible, Canadian
Tire needs to earn only $1 more in EBIT to be able to pay $1 in added interest.
The tables are turned when we contrast interest and dividends earned by the firm. Interest earned is fully
taxable, just like any other form of ordinary income. Dividends on common shares received from other
Canadian corporations qualify for a 100% exemption and are received tax free.
Capital Gains and Carry-Forward and Carry-Back
When a firm disposes of an asset for more than it paid originally, the difference is a capital gain. As with
individuals, firms receive favourable tax treatment on capital gains. At the time of writing, capital gains
received by corporations are taxed at 50% of the marginal tax rate.
When calculating capital gains for tax purposes, a firm nets out all capital losses in the same year. If
capital losses exceed capital gains, the net capital loss may be carried back to reduce taxable capital
gains in the three prior years. Under this loss carry-back feature, a firm files a revised tax return and
receives a refund of prior years’ taxes. For example, suppose a Canadian corporation experienced a net
capital loss of $1 million in 2019 and net capital gains of $300,000 in 2018, $200,000 in 2017, and
$150,000 in 2016. Said corporation could carry back a total of $650,000 to get a refund on its taxes.
The remaining $350,000 can be carried forward indefinitely to reduce future taxes on capital gains. This
is a loss carry-forward.
A similar loss carry-back and carry-forward applies to non-capital losses. Non-capital losses can be
carried back three years. Carrying non-capital losses forward is a bit more complex, as different rules
apply for different types of losses
What is capital cost allowance cca
depreciaiton for tax purposes!
What are the rules for revaluation under IFRS
- all items in an asset class should be revalued together
- revaluation performed regularly enough so carrying aount not MATERIALLY diff from fair value
what is capital gain tax
paid on the investments increase in value over the price it was purchased
What is CCA “TAX SHIELD”
capital cost allowance is depreciation for tax purposes
-> you deduct this before tax and this lowers the taxes you face
How to apply cca
ONLY BUSINESSES CAN USE THIS, AND YOU APPLY THE ACCELERATED INVESTMENT RULE
what is accelerated investment rule
in the first year, 1 and 1/2 times the prescribed rate can be used for CCA
how to apply accelerated investment rule
- Look at what class the asset falls into, and note the rate of tax
- Take the beginning fixed asset IN YEAR ONE only, multiply it by 1.5, then multiply it by the rate of tax
Beginning fixed asset x 1.5 x rate%= CCA
- [Beginning fixed assets-CCA] The answer is your ending fixed assets for this year
- For year 2, take the past years ending fixed assets and then multply by REGULAR tax rate (no 1.5)
Ending fixed assets x %Rate= CCA
- Subtract 2nd cca from the first ending to get second ending
Ending fixed assets- CCA= Ending Fixed Assets 2
What is an asset class CCA
Asset class could be machinery, and a firm could have 15 machines
asset class could be vehicles and they could have 349 vehicles
COLLECTION OF LIKE ASSETS
When an asset is sold, what happens to the asset class
REDUCE it, by either the realized value of the asset or by its original cost (whichever is less)
What is closing an asset class
when the final asset in a class is sold, the class is empty,
SO WE TERMINATE THE ASSET CLASS!!!
this can result in either a terminal loss or recaptured CCA
Terminal Loss
difference between the Undepreciated Capital Cost (UCC) and adjusted cost when the UCC is greated
Adjusted Cost- UCC, UCC is greater (negative value)
Recaptured CCA
THE TAXABLE difference between the adjusted cost and the UCC when the UCC is smaller
Adjusted cost-UCC, UCC is smaller
How to do CCA question where you determine if there is a CCA recapture or terminal loss?
- MAKE A TABLE TO PLAN OUT YEARS (Beginning UCC | CCA | ENDING UCC)
- Beginning fixed assets x 1.5 x tax rate=CCA
- Beginning fixed- CCA= Ending Fixed Assets Y1
- Ending Fixed Assets Y1 x tax rate= CCA
- Ending Fixed Assets Y1- CCA- Ending Fixed Assets Y2
— do this as much as you need to—
- Figure out the final ending fixed assets value, and see
- IS THERE A CAPITAL GAIN? was asset sold for MORE than it was BOUGHT(no if depreciation occured)
-IS THERE A CCA RECAPTURE? If Ending UCC< Adjusted cost (sold for more than the ending value)
FIGURE OUT CCA RECAPTURE THROUGH (-)
-IS THERE A TERMINAL LOSS? If Ending UCC>Adjusted cost (sold for less than the ending value)
