Financial Statements

Question 1

What is a deferred tax asset?

Answer 1

1. An asset on a company’s balance sheet that may be used to reduce any subsequent period’s income tax expense.
2. Must be determined that there is more than a 50% probability that the company will have positive accounting income in the next fiscal period before it can be applied.

Question 2

What are four examples of situations that create deferred tax assets?

Answer 2

1. Warranties,
2. restructuring charges,
3. net operating losses, and
4. unrealized security losses

Question 3

What is a deferred tax liability?

Answer 3

1. An account on a company’s balance sheet that is a result of temporary differences between the company’s accounting and tax carrying values, the anticipated and enacted income tax rate, and estimated taxes payable for the current year.
2. Records the fact that the company will, in the future, pay more income tax because of a transaction that took place during the current period.

Question 4

What events create deferred tax liabilities?

Answer 4

1. Depreciation
2. Research and development- or merger-related expenses, where management estimates can make shareholder and taxable incomes different.

Question 5

What is the effective tax rate?

Answer 5

The rate a taxpayer would be taxed at if taxing was done at a constant rate, instead of progressively.

Calculated as total tax paid divided by taxable income.