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
Why might a company prefer an operating to a financing lease ?
It reduces reported debt
In spite of the binding commitment, an operating lease does not involve any debt being reported
Under US GAAP only debt issue costs are:
Shown as an asset (a deferred charge)
Which accounting standard(s) is/are most likely to require deferred tax in relation to temporary differences arising from investments in domestic subsidiaries or joint ventures, after 1992 but not before 1992?
US GAAP
Effective Tax Rate (ETR) =
Income Tax Expense / Pre-Tax Income
Which reporting standard requires deferred tax assets and liabilities to be reported under noncurrent balance sheet items?
IFRS
not GAAP
Under US GAAP convertible issues are accounted for as a:
Liability
The conservative assumption is that they will not necessarily be converted, so will have to be repaid like other debt
FIFO COGS =
LIFO COGS - (change in LIFO reserve)
Tax Expense =
Pre-Tax Income - Net Income
Pre-Tax Income =
Taxable Income + (DTL/Tax Rate) - (DTA/Tax Rate)
Asset Turnover =
Sales
/
Total Assets
Adjusted Interest Coverage Ratio =
Adjusted EBIT
/
Adjusted Interest
Valuation allowances are set aside to cover:
the likelihood that deferred tax assets may not be realised
A defined benefit pension plan is most likely to be valued according to:
Expected rates of return
Capitalizing an expense results in higher (1) ___ _____ and lower (2) ____ _____.
- net income
2. debt ratio
A sales type lease is recorded on the lessor’s balance sheet at which price, and a finance lease at which price?
Carrying Value, Carrying Value
As far as the balance sheet is concerned, lessors account for both types of leases as the present value of cashflows. Different treatment arises on the income statement.
US GAAP is most likely to require tax rates and tax laws to have been:
Enacted
IFRS in contrast allows for the possibility that further approvals are needed to enact the laws.
What is the most likely impact of an increase in the valuation allowance a company recognizes against a deferred tax asset?
A decrease in total assets and a decrease in net income.
The accrual of income tax expense expected to be paid (or recovered) in future years is the definition of:
Deferred income tax expense
What are the 3 criteria that an identifiable intangible asset must meet under IFRS?
- Must be identifiable
- Must be under control of the company
- Must be expected to generate future economic benefits
The tax return liability resulting from current period taxable income is the definition of:
Taxes payable
If tax deductible-expenses are lower than accounting expenses, then taxable income will be (higher/lower) than accounting income. This would result in a (DTA/DTL).
Higher; DTA
Under US GAAP, the reconciliation of actual and expected tax expense is most likely to be required for which types of companies?
Public companies
Disclosure and reporting requirements are nearly always more onerous for public than for private companies.
Under U.S. GAAP, a lease must be classified by the lessee as a finance (capital) lease if any one of the following four criteria is met:
- The title is transferred to the lessee at the end of the lease period.
- A bargain purchase option exists.
- The lease period is at least 75% of the asset’s life.
- The present value of the lease payments is at least 90% of the fair value of the asset.
Name 4 advantages to leasing assets rather than acquiring.
- Less costly financing
- Reduced risk of obsolescence
- Less restrictive provisions compared to other forms of financing
- Off-balance sheet item in case of operating lease which increases leverage
Regarding long-term assets currently in use, US GAAP is most likely to allow for:
Neither upwards asset revaluations, nor reversals of asset write downs
Double-declining-balance method:
Annual depreciation Expense =
Net Book Value * (2 / Useful life in years)
Accounting profit is most likely to be described as:
Income before taxes
When outcome cannot be reliably measured, which method is used?
The completed contract method
‘A retirement plan in which the firm promises to make periodic payments to employees after retirement. Because the employee’s future benefit is defined, the employer assumes the investment risk.’
This describes:
Defined benefit plan
Under which accounting standard are firms required to disclose estimated amortization expense for the next five years on intangible assets?
U.S. GAAP
A deferred tax asset occurs if taxable income is (more/less) than pretax income and this will reverse in future
More
With regards to the lessor, the leased asset is brought to the balance sheet and continues to be depreciated when the lease is classified as a(n):
Operating lease
In an operating lease the underlying asset remains on the balance sheet of the lessor. With the other types of lease, the lease receivable is the asset on the balance sheet. Not the leased asset. Remember that will be on the leasee’s balance sheet.
When the market rate is greater than the coupon rate, a bond is issued at:
A discount
An increase in tax rates has what impact on deferred tax assets, and what impact on deferred tax liabilities?
Increases, increases
‘A retirement plan in which the firm contributes a
sum each period to the employee’s retirement account. The investment decisions are left to the employee, who assumes all of the investment risk.’
This describes:
Defined contribution plan
Assets and liabilities are most likely to be taxed on what basis, and accounted for on what basis?
Tax base, carrying amounts
Give 5 examples of Period Costs. How are they recorded?
unallocated overhead, abnormal waste, most storage costs, administrative costs, and selling costs.
They are expensed.
US GAAP Impairment Test:
Step 1: Assess recoverability: Compare carrying amount with undiscounted future net cash flows.
If recoverability test is not satisfied, an impairment loss is required.
Step 2: Determine impairment loss: (carrying amount - fair value)
Estimated depreciation in xx15 =
(New carrying value - revised residual value)
/
Revised useful life
Income tax expense is:
An expense that is recognised in financial statements calculated on the basis of pretax income.
When analysing ratios, the general FIFO/LIFO decision should be:
use LIFO numbers for ratios that are income related and use FIFO for ratios that are balance-sheet related
