an interview question

just got the question which i thought might be related to level 1```` how is the tax rate change affect the financial staments? all the three or some of them? I think it affect all the financial statements. Income statement: definitly cause the tax expense to change. Cash flow: not for sure whether the intersest tax saving would be affected. Blance sheet: defered tax would be adjusted, but how to deal with it? anyone has some ideas?

My guess is that the CF statement will be affected. After all, since the tax rate is going to affect net income, there will be an impact on the figures in the CF statement since you start of f with the component for NI in the CF statement?

So would your personal cash flow statement be affected by a tax rate change?

Drugs are bad, m’kay?

When tax rates change, deferred tax assets and liabilities are readjusted to reflect the taxes that will be incurred when the reversals occur (proper matching). The new tax rate is used for timing differences as soon as the law instituting the tax change is enacted, even if the law is not yet officially in force. Adjustments to previous balances are disclosed as additions or reductions in the deferred tax component of income tax expense. Changes in tax rates affect the effective tax rates from the year new tax rates are enacted until the new tax rates are in effect. Income tax expense = Current tax expense(Current rate) + Deferred tax expense (future rate)+ DTA/L adj.(future-current) So, the ending DTA/L amount changes on the balance sheet, The change in Income tax expense flows through the income statement in the same period. And you add this expense to New Income in CF statement.

anishcandy, ur answer seems completly conclusive and thanks to all ur guys for ur help. i just feel the more i learn, the harder to get the big picture of the financial statement.:slight_smile: