Ch 2 FS, CF, Taxes Flashcards

Question

Cash flow to/from creditors (liabilitiyes)

Answer 1

interest paid- net new borrowing

Answer 2

dividends - net new equity rrraised

Answer 3

see if the cash flow identity is true

Answer 4

yes! usually

Answer 5

yes if the firm is growing!!!

Answer 6

cash flows are measured after taxes

Answer 7

1. tax burden equally distribute 2. taes should not change efficient allocation of resources by market 3. easy to adminster syste

Answer 8

-income from imploments -unicorporated business -investment income

Answer 9

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

Answer 10

federal tax rate + provincial tax rate

Answer 11

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

Answer 12

marginal tax rate because i concerns the potential new portion of cash flows

Answer 13

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

Answer 14

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.

Answer 15

-higher prices for consumers -low wage to workers -low returns for investors

Answer 16

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.

Answer 17

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

Answer 18

depreciaiton for tax purposes!

Answer 19

1. all items in an asset class should be revalued together 2. revaluation performed regularly enough so carrying aount not MATERIALLY diff from fair value

Answer 20

paid on the investments increase in value over the price it was purchased

Answer 21

capital cost allowance is depreciation for tax purposes -> you deduct this before tax and this lowers the taxes you face

Answer 22

ONLY BUSINESSES CAN USE THIS, AND YOU APPLY THE ACCELERATED INVESTMENT RULE

Answer 23

in the first year, 1 and 1/2 times the prescribed rate can be used for CCA

Answer 24

1. Look at what class the asset falls into, and note the rate of tax 2. 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 3. [Beginning fixed assets-CCA] The answer is your ending fixed assets for this year 4. 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 5. Subtract 2nd cca from the first ending to get second ending Ending fixed assets- CCA= Ending Fixed Assets 2

Answer 25

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

Answer 26

REDUCE it, by either the realized value of the asset or by its original cost (whichever is less)

Answer 27

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

Answer 28

difference between the Undepreciated Capital Cost (UCC) and adjusted cost when the UCC is greated Adjusted Cost- UCC, UCC is greater (negative value)

Answer 29

THE TAXABLE difference between the adjusted cost and the UCC when the UCC is smaller Adjusted cost-UCC, UCC is smaller

Answer 30

1. MAKE A TABLE TO PLAN OUT YEARS (Beginning UCC | CCA | ENDING UCC) 2. Beginning fixed assets x 1.5 x tax rate=CCA 3. Beginning fixed- CCA= Ending Fixed Assets Y1 4. Ending Fixed Assets Y1 x tax rate= CCA 5. Ending Fixed Assets Y1- CCA- Ending Fixed Assets Y2 --- do this as much as you need to--- 6. 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)