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Corp 2: Conceptual Framework (Taxes (temporary differences (Scenarios (Tax…
Corp 2: Conceptual Framework
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
differences are nontaxable, deductible
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
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
include producing and delivering goods and services
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
Investing
relate to the acquisition and sale of property, PPE, long -term investments, intangible assets
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
Financing
borrowing from creditors/ repaying creditors, obtaining resources, providing owners with return of investment
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
Complexities in Cash Flows
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