1. Which of the following statements is not true about a deferred tax liability?

Question

1. Which of the following statements is not true about a deferred tax liability?

a. It is a present obligation

b. It results from a past transaction

c. It causes taxable income in future periods to be less than financial income

d. It represents a future sacrifice

e. None of these answers are correct

2. The purchase of a company outstanding capital stock would be reported as a ___________ in the ____________ activities section of the Statement of Cash Flows.

a. none of these answers are correct

b. cash outflow ; financing

c. cash outflow ; investing

d. cash outflow ; operating

e. cash inflow ; investing

3. FASB prohibits retrospective accounting treatment for changes in accounting estimates.

True

False

Explanation / Answer

1 Deferred tax liability is a long term liability , so is a present obligation and results from past transaction. It is future tax payable when in future Taxable Income will be more than Financial Income. So the statement 'It causes taxable income in future periods to be less than financial income'' is not true as due to daeferred tax future taxable income will be higher than financial income.

2. The purchase of a company's outstanding stock is a cash outflow and a financing activity.

So statement b. is correct.

3. FASB prohibits retrospective accounting treatment for changes in accounting estimates is correct as any change in accounting estimate is generally done prospectively not restrospectively. Only changes realted to Accounting Principles and prior period corrections to be applied restrospectively . So the statement is true in its content.

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