Corp 2: Conceptual Framework
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Taxes
income tax expense based on book income
income tax payable based on taxable income
when book income= taxable income, there is a tax conformity, tax expense = tax payable
permanent differences
an item was included in computation of taxable income, not book income OR an item was included in book income, not taxable income
when book income > taxable income
municipal interest income
dividend received deduction
life insurance death proceeds
domestic production activities deduction
when book income < taxable income
fines and penalties
certain meals/ entertainment expenses
life insurance premiums
expenses incurred in securing tax-exempt income
differences are not deductible
differences are nontaxable, deductible
temporary differences
book and tax treatment different in a given year, same over life of firm
creates either a deferred tax liability or a deferred tax asset
computed by multiplying the [income tax rate] * [difference of book carrying value - tax basis of comparable assets/ liabilities]
Scenarios
Tax Basis of Asset > Book Basis of Asset --> deferred tax asset
Book Basis of Asset > Tax Basis of Asset --> deferred tax liability
Tax Basis of Liability > Book Basis of Liability --> deferred tax liability
Book Basis of Liability > Tax Basis Liability --> deferred tax asset
Differences that lead to Deferred Tax Liabilities
installment sales
depreciation
goodwill
equity method investment
Differences that lead to Deferred Tax Assets
unearned revenues
contingent liabilities
bad debt expense
warranty liability
Temporary Difference Reversal
has to pay the taxes it previously recorded as a DTL or
receives the benefits reduced taxes originally as the DTA
Realizability
uses valuation allowance to reduce balance of deferred tax asset
income tax benefit reduction of income expense, increases income
changes the effective tax rate
net operating losses, carry backs, carry forwards
carryback how firms offset current tax loss
carryforward gives rise to a deferred tax asset, offset current tax loss against taxable income
tax contingencies liabilities that represent the amount that a company assesses it will owe the government
Pensions
contributory plans require employees to cover some or all pension benefit costs and allow employees to make additional contributions to increase retirement
non-contributory plans employer is responsible for funding full cost of plan
defined contribution employer contributes a fixed amount each period (% salary)
defined benefit specifies the benefits that the employee will receive at retirement
Cash Flows
summary of sections
Operating
Investing
Financing
borrowing from creditors/ repaying creditors, obtaining resources, providing owners with return of investment
include producing and delivering goods and services
relate to the acquisition and sale of property, PPE, long -term investments, intangible assets
Complexities in Cash Flows
receipts from customers
cash payments for purchase of goods for resale or for use in production
cash payments to suppliers/ employers
cash payments related to taxes
cash payments of interest
collection or sale of notes receivable
sale of debt/ equity securities to other entities
payments for loans made by entity
payments for debt/ equity securities of other entities
payments for PPE other entities
issuing equity to owners
receipts from borrowing through notes, bonds, etc.
payments to repurchase equity from owners
payments to repurchase equity from owners
payments for principal on debt
acquisition and disposition of long-term assets
report the gain or loss
deduct gains
add losses
deferred income taxes
report adjustments for change
deduct decreases for DTL/ increases for DTA
add increases DTL, decreases DTA
net accounts receivable and bad debt expense
separate changes in net accounts receivable
unrealized gains/losses in FVA adjustments
deduct unrealized gains
add unrealized losses
Equity Method Investments
affected by change in equity income/ loss recognized by investor company and cash dividends received from investee
Share Based Compensation
add back share based comp. recognized
pension adjustment
expense > amount funded add back
expense < amt funded deduct from NI
amortization of bond premiums/ discounts
add back bond discount amortizations
deduct bond premium amortization