SS 9. FR&A: Inventories, Long-lived Assets, Income Taxes, and Non-current Liabilities Flashcards
U.S. GAAP requires that long term contracts whose outcomes can be reliably measured should be accounted for using:
the percentage-of-completion method
A deferred tax liability occurs when taxable income is (more/less) than pretax income and this will reverse in future
Less
LIFO reserve =
Inventory (FIFO) – Inventory (LIFO).
Installment method calculation =
Gross profit % x Cash collected
Given some inflation, a LIFO liquidation is most likely to have what impact on profitability ?
Increase
Off balance sheet financing refers to the practice of:
raising liabilities without recognizing them on the balance sheet.
The tax base is equal to:
The purchase price of the asset less any accumulated tax depreciation
Regarding statutory and effective tax rates, the effective tax rate will be different if:
the company has permanent differences originating during the year.
Timing differences are adjusted via deferred tax charges/credits. Permanent differences are not adjusted and hence will cause the effective rate will be different to the statutory.
The difference between taxable income and pre-tax income (ignoring any permanent differences) equals:
deferred tax expense
/
statutory tax rate
Differences in taxable income and pre-tax accounting income that will not be offset by corresponding differences or ‘turn around’ in future periods are called:
Permanent differences
Give 5 examples of a temporary difference on income tax expense:
- Impairment of Assets
- The result from using different inventory valuation methods
- Restructuring costs
- Post-employment benefits
- Deferred compensation
What is the U.S. GAAP treatment of computer software development?
Once feasibility and economic viability has been established all further costs associated with software - whether for internal use or external resale - must be capitalized.
Expensing instead of capitalizing increases the _______ _______ as the income recorded in an expensing year will be much lower than the proceeding years.
Income variability
Which of the inventory methods is acceptable under US GAAP but not IASB?
LIFO
A valuation allowance (increases/reduces) deferred tax (assets/liabilities) if management deems they might not materialise
Reduces; Assets
Pre-tax income =
Taxable income
+ (Increase in deferred tax liabilites/ Tax rate)
- (Increase in deferred tax assets / Tax rate)
The tax base of an asset is:
The amount that will be deductible (against taxable income) in future periods.
The balance sheet tax amount that is expected to be recovered from future operations is the definition of the:
Deferred tax asset
When a firm is not confident about recovering the carrying amount of an asset, the asset has to be:
Impaired
U.S. GAAP requires that an asset is impaired if its future cash flows (un-discounted) are less than its carrying value.
Income tax expense =
Income tax payable - Income tax recoverable - Change in deferred tax assets + Change in deferred tax liabilites
The tax return loss that can be used to reduce taxable income in future years =
Tax loss carry forward
What adjustment should an analyst make if he expects that a deferred tax liability cannot be reversed in future?
The DTL should be treated as equity
All else being equal, if the purchase price of inventory is increasing, a company that accounts for its inventory under last-in, first-out (LIFO) instead of first-in, first-out (FIFO) is most likely to have a higher:
Debt to Equity ratio
With rising costs of inventory, a company using LIFO compared with FIFO will report a higher cost of sales and lower profits. This scenario will result in lower increments to retained earnings and a higher debt-to-equity ratio.
LIFO reserve =
FIFO inventory - LIFO inventory
