LM 8: Analysis of Income Taxes

Question 1

What is accounting profit?

Answer 1

pretax income reported on income statement

Question 2

What is taxable income?

Answer 2

amount of income subject to taxes, deductions, and etc.

Question 3

What is income tax payable?

Answer 3

a liability reported for financial accounting purposes that indicates the amount that an organization expects to pay in income taxes within 12 months.

Question 4

What is tax expense?

Answer 4

the total amount of taxes owed by an individual, corporation, or other entity to a taxing authority.

Question 5

What is deferred tax assets?

Answer 5

an item on the balance sheet that results from the overpayment or the advance payment of taxes. taxes paid but no recognized on the income statement

Question 6

What is a valuation allowance?

Answer 6

a reserve that is used to offset the amount of a deferred tax asset incase company doesn’t recover deferred tax asset

Question 7

What is deferred tax liabilities?

Answer 7

a listing on a company’s balance sheet that records taxes that are owed but are not due to be paid until a future date.

Question 8

What is income tax paid?

Answer 8

total amount of income tax paid

Question 9

What is tax base?

Answer 9

total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority.

percentage of value an asset can be taxed (buying equipment and it depreciated 20% for tax reporting.)

Question 10

What is carrying amount?

Answer 10

cost of asset less any depreciation

Question 11

How often must deferred tax assets and liabilities be recalculated and by comparing what two items?

Answer 11

recalculated every year by comparing the tax bases and carrying amounts

Question 12

When should a deferred tax asset or liability be established?

Answer 12

if future economic benefits are expected (company is expected to stay in business)

Question 13

What is tax base of an asset?

Answer 13

amount deductible for tax purposes in future

Question 14

What happens to deferred tax assets and liabilities when income rates change?

Answer 14

if income rate increase so will deferred tax rate and liabilities

if income rate decrease so will deferred tax assets and liabilities

Question 15

What is deferred tax liability equation?

Answer 15

(carrying value - tax base) * tax rate

Question 16

Whats the equation for reported effective tax rate?

Answer 16

reported effective tax rate = income tax expense / pretax accounting profit

Question 17

If an asset has a greater carrying amount than tax base is it a deferred tax liability or asset?

Answer 17

carrying amount > tax base

deferred tax liability

Question 18

If an asset has a greater tax base than carrying amount is it a deferred tax liability or asset?

Answer 18

carrying amount < tax base

deferred tax asset

Question 19

If a liability has a greater carrying amount than tax base is it a deferred tax liability or asset?

Answer 19

carrying amount > tax

deferred tax asset

Question 20

If a liability has a greater tax base than carrying amount is it a deferred tax liability or asset?

Answer 20

carrying amount < tax

deferred tax liability

Question 21

What 2 disclosures can be found in the supplementary notes to the financial statements about taxes? JS

Answer 21

1. jurisdictions that are charging the taxes
2. some details behind the tax calculation

Question 22

What is the statutory tax rate?

Answer 22

corporate income tax rate imposed by law on taxable income

Question 23

What is the effective tax rate?

Answer 23

percentage of income taxes actually paid after taking into account tax breaks

Question 24

What is the cash tax rate?

Answer 24

actual amount of cash taxes paid

Question 25

What are the 4 causes of a difference in statutory tax rate and effective tax rate? TWAE

Answer 25

1. Tax credits
2. Withholding taxes on dividends
3. Adjustments to previous year’s financial reports
4. Expenses not being deductible for tax purposes