b. Will the adjustment to net income for deferred taxes to compute cash flow fro
ID: 2773876 • Letter: B
Question
b. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2012, 2013 and 2014?
c. The company's accrued liabilities include accrued wages, self-insurance, accrued taxes, accrued utilities, and accrued interest etc. Why are deferred taxes related to accrued liabilities disclosed as a deferred tax asset instead of a deferred tax liability?
d. Why are deferred taxes related to share-based compensation disclosed as a deferred tax asset?
e. Like most companies, Wal-Mart uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability?
Explanation / Answer
a) Deferred tax benefit is used to reduce the taxable income in the income statement for financial reporting purposes while the Deferred tax expense is used to reduce the taxable income in the income statement for financial reporting purposes .Income before taxes -Deferred tax benefit =taxable income and Income before taxes +Deferred tax expense=taxable income, thus for 2012 there is a Deferred tax expense that shall make Income before taxes fall short of taxable income while in years 2013 and 2014 there is a Deferred tax benefit that shall make Income before taxes exceed taxable income .
b) In 2012 there is increase in Deferred tax benefit is subtracted from cash flow from operations as part of adjustment to income statement(loss),while in 2013 and 2014 there is decrease in Deferred tax benefit is added to cash flow from operations as part of adjustment to income statement(gain)
c) All the company's accrued liabilities are expenses paid so that these expenses shall create tax benefits in the form of Deferred tax benefit.(losses or expenses creates tax benefits) therefore these are disclosed as deferred tax asset instead of a deferred tax liability.
d) share-based compensation,for taxable purposes these compensation is not yet recognised but in income statement these are expenses recognised so that the difference creates a deferred tax asset of expense*tax rate.
e) The depreciation for financial reporting using straight-line depreciation method is less in early years as compared to depreciation for income tax purposes using accelerated depreciation methods these results in a taxable income created less for income tax purposes than financial reporting these results in a net deferred tax liability equal to taxrate*difference in taxable incomes as the taxes are not yet fully recognised in the financial reporting and are a deferred tax liability to be recognised in the financial reporting later so that in end the total tax expenses in both reportings are equal.
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