Inventories/LT assets/taxes Flashcards
Double declining balance depreciation method
= (Orig cost - prev deprec) • 2 / dep life
Deferred Tax Liability calculation
= [(pretax income - depreciation) - (taxable income - depreciation)] • tax rate + prev yr DTL
Units of production depreciation method
= (orig cost - salvage val)
•
(Output units in period)/(life in output)
pretax income
income before income tax expense on the income statement
taxable income
income subject to tax as reported on the tax return
taxes payable
tax liability based on taxable income, as shown on the tax return
income tax paid
actual cash outflow for taxes paid during the current period
tax loss carryforwards
losses that could not be deducted on the tax return in the current period but may be used to reduce taxable income and taxes payable in future periods
income tax expense
noncash income statement item that includes: \+ cash tax expense \+ increase in DTL - decrease in DTL - increase in DTA \+ decrease in DTA
deferred income tax expense
excess of income tax expense over taxes payable
valuation allowance
a contra account that reduces a deferred tax asset for the probability that it will not be realized under US GAAP
Deferred Tax Asset
taxable income (tax return) > pretax income (fin stmt)
revenues recognized prior to recording on financial statement
expenses for financial reporting are reported prior to recognizing them as deductible expense for tax
Deferred Tax Liability
taxable income (tax return) < pretax income (fin stmt)
expected to result in future cash outflows
depreciation expense on income statement is less than depreciation expense on tax return
LIFO v FIFO on Income Statement
Under LIFO…
COGS - higher
EBT - lower
TAXES - lower
NET INCOME - lower
LIFO v FIFO on Balance Sheet
Under LIFO…
Inventories - lower
working capital - lower
R/E - lower
LIFO v FIFO in Cash Flows
Under LIFO….
CFO is higher
product costs
capitalized under inventories on the balance sheet
- purchase costs less trade discounts and rebates
- conversion costs incl labor and overhead
- other costs necessary to bring inventory to present location and condition
period costs
expensed in period incurred
- abnormal waste of materials, labor, overheads
- storage costs
- administrative overhead
- selling costs
COGS
= beginning inventory
+ purchases
- ending inventory
periodic inventory system
inventory values and COGS are determined at the end of the accounting period
perpetual inventory system
inventory values and COGS are updated continuously
Capitalization v. Expensing
Capitalizing produces….
lower income variability higher profitability early on lower profitability later the same cash flows higher CFO lower CFI lower debt/equity ratio
straight-line depreciation
= (cost - salvage value) / useful life
double declining balance depreciation
= (cost - accumulated deprecation) x 2/useful life
more to write-off means less taxable income at first
unites of production depreciation method
depreciation =
cost - salv) x (units prod/hrs wkd) / (total units/hrs
intangibles not capitalized under US GAAP
R&D
advertising
software development to est. feasibility
intangibles capitalized under US GAAP
purchased patents, copyrights, franchises, licenses, brands, trademarks
direct response advertising
goodwill arising from transactions
software development costs once feasibility is established
Impairment Recognition US GAAP
- recoverability test: carrying value > undiscounted cash flow from asset’s use and disposal
- loss measurement: loss = carrying value - fair market value (or PV of CFs)
