Kingpin804

Which of the following factors will NOT impact the classification of deferred tax liabilities?

A) Present value of the future payments.

B) Growth of the firm.

C) Changes in firm operations.

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The present value of the future payments will not impact the classification of deferred tax liabilities. Growth of the firm and the firm’s operations can each have an impact on classification of deferred tax liabilities. These can result in non-payment of deferred taxes even if they are reversed.

Kingpin804

Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity?

A) Return on assets (ROA).

B) Return on equity (ROE).

C) Debt-to-total assets.

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The ROA will not be affected by the classification of the deferred taxes. The total assets will remain the same regardless of whether the deferred taxes are classified as a liability or equity.

Kingpin804

For analytical purposes, if a deferred tax liability is expected to not be reversed, it should be treated as a(n):

A) immaterial amount and ignored.

B) liability.

C) an addition to equity.

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If deferred tax liabilities are expected to never reverse, they should be treated as equity for analytical purposes. This situation usually arises because of growth in capital expenditures.

karoliukas

When analyzing a company's financial leverage, deferred tax liabilities are best classified as:

A) a liability.

B) neither as a liability, nor as equity.

C) a liability or equity, depending on the company's particular situation.

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Depends on the "performance" of the timing difference.

karoliukas

Which of the following statements regarding deferred taxes is NOT correct?

A) If deferred tax liabilities are not included in equity, debt-to-equity ratio will be reduced.

B) Only those components of deferred tax liabilities that are likely to reverse should be considered a liability.

C) If deferred taxes are not expected to reverse in the future then they should be classified as equity.

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When deferred tax liabilities are included in equity, it will reduce the debt-to-equity ratio (by increasing the denominator), in some cases considerably.

karoliukas

If timing differences that give rise to a deferred tax liability are not expected to reverse then the deferred tax:

A) should be considered an increase in equity.

B) must be reduced by a valuation allowance.

C) should be considered an asset or liability.

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If deferred tax liabilities are expected to reverse in the future, then they should be classified as liabilities.  If, however, they are not expected to reverse in the future, then they should be classified as equity.

karoliukas

Which of the following best describes valuation allowance? Valuation allowance is a reserve:

A) created when deferred tax assets are greater than deferred tax liabilities.

B) against deferred tax assets based on the likelihood that those assets will not be realized.

C) against deferred tax liabilities based on the likelihood that those liabilities will be paid.

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Valuation allowance is a reserve against deferred tax assets based on the likelihood that those assets will not be realized. Deferred tax assets reflect the difference in tax expense and taxes payable that are expected to be recovered from future operations.

karoliukas

If a firm uses accelerated depreciation for tax purposes and straight-line depreciation for financial reporting, which of the following results is least likely?

A) Income tax expense will be greater than taxes payable.

B) A permanent difference will result between tax and financial reporting.

C) A temporary difference will result between tax and financial reporting.

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A permanent difference between tax and financial reporting is a difference that is expected to not reverse itself. Under normal circumstances, the effects of the different depreciation methods will reverse.

karoliukas

A tax loss carryforward is best described as the:

A) net taxable loss that can be used to reduce taxable income in the future.

B) net taxable loss that can be used to refund paid taxes from the previous year.

C) difference of deferred tax liabilities and deferred tax assets.

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A tax loss carryforward is the net taxable loss that can be used to reduce taxable income in the future.

karoliukas

The difference between income tax expense and taxes payable is a:

A) deferred income tax expense.

B) deferred tax liability.

C) timing difference.

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Taxes payable is defined as the taxes due to the government as determined by taxable income and the tax rate, while income tax expense is the amount actually recognized on the income statement. Deferred income tax expense is defined as the difference in income tax expense and taxes payable. Each individual deferred item is expected to be paid (or recovered) in future years.