deferred tax liabilities

Examples of deferred tax liabilities in the following topics:

• Effects of GAAP on the Income Statement

  • Although most of the information on a company's income tax return comes from the income statement, there often is a difference between pretax income and taxable income.
  • These differences are due to the recording requirements of GAAP for financial accounting (usually following the matching principle and allowing for accruals of revenue and expenses) and the requirements of the IRS's tax regulations for tax accounting (which are more oriented to cash).
  • Such timing differences between financial accounting and tax accounting create temporary differences.
  • For example, rent or other revenue collected in advance, estimated expenses, and deferred tax liabilities and assets may create timing differences.
  • The historical cost principle: It requires companies to account and report based on acquisition costs rather than fair market value for most assets and liabilities.

• Balance Sheets

  • A standard balance sheet has three parts: assets, liabilities, and ownership equity; Asset = Liabilities + Equity.
  • A standard company balance sheet has three parts: assets, liabilities, and ownership equity.
  • Assets are followed by the liabilities.
  • According to the accounting equation, net worth must equal assets minus liabilities.
  • The small business's equity is the difference between total assets and total liabilities.

• How Business Activities Affect the Balance Sheet

  • As an example of a business activity that would affect liabilities, let us once again consider a company who purchases inventory.
  • Because liabilities are on the right side of the balance sheet equation, this makes for an actual decrease on the balance sheet itself.
  • Another example of a business activity affecting liabilities would be the issuance of corporate bonds.
  • Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities).
  • Usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity.

• Pro Forma Balance Sheet

  • The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes.
  • Formally, shareholders' equity is part of the company's liabilities: they are funds "owing" to shareholders (after payment of all other liabilities).
  • Usually, however, "liabilities" is used in the more restrictive sense of liabilities excluding shareholders' equity.
  • The balance of assets and liabilities (including shareholders' equity) is not a coincidence.
  • In this sense, shareholders' equity by construction must equal assets minus liabilities, and are a residual.

• Income Statements

  • ., depreciation and amortization of various assets) and taxes.
  • When combined with income from operations, this yields income before taxes.
  • The final step is to deduct taxes, which finally produces the net income for the period measured.
  • Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/tax payable) and the amount of deferred tax liabilities (or assets).
  • These are reported net of taxes.

• Other Expenses

  • Other expenses include SG&A, depreciation, amortization, R&D, finance costs, income tax expense, discontinued operations expenses.
  • Administrative expenses - executive salaries, general support, and all associated taxes related to the overall administration of the company.
  • Such expense is recognized by businesses for financial reporting and tax purposes.
  • Methods and lives may be specified in accounting and/or tax rules in a country.
  • Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities/ tax payable) and the amount of deferred tax liabilities (or assets).

• Pro Forma Income Statement

  • The pro forma models the anticipated results of the transaction, with particular emphasis on the projected cash flows, net revenues and (for taxable entities) taxes.
  • It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of various assets) and taxes.
  • Expenses - Cash outflows or other using-up of assets or incurrence of liabilities during a period from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major operations.
  • Income tax expense - sum of the amount of tax payable to tax authorities in the current reporting period (current tax liabilities / tax payable) and the amount of deferred tax liabilities (or assets).
  • These are reported net of taxes.

• Calculating Expected Value

  • Net working capital is calculated as current assets minus current liabilities.
  • If current assets are less than current liabilities, an entity has a working capital deficiency, also called a "working capital deficit. "
  • Current assets and current liabilities include three accounts which are of special importance.
  • An increase in working capital indicates that the business has either increased current assets (that it has increased its receivables, or other current assets) or has decreased current liabilities, for example, has paid off some short-term creditors.
  • Current Assets - Current liabilities (excluding deferred tax assets/liabilities, excess cash, surplus assets, and/or deposit balances).

• Answers to Chapter 12 Questions

  • The Fed's liabilities are currency outstanding, deposits by depository institutions, U.S.
  • Treasury deposits, foreign and other deposits, Deferred Availability Cash Items (DACI), Federal Reserve float.
  • The Fed's net worth equals total assets minus total liabilities.
  • People buy Christmas presents in December and pay their taxes in April.
  • As the Federal Reserve buys or sells foreign currencies, the Fed's assets and liabilities change.

• Assets

  • A standard company balance sheet has three parts: assets, liabilities and ownership equity.
  • A current asset on the balance sheet is an asset which can either be converted to cash or used to pay current liabilities within 12 months.
  • For example, if a service contract is paid quarterly in advance, at the end of the first month of the period two months remain as a deferred expense.
  • In the deferred expense, the early payment is accompanied by a related, recognized expense in the subsequent accounting period, and the same amount is deducted from the prepayment.
  • These often receive favorable tax treatment (depreciation allowance) over short-term assets.