Can anyone make logical sense of why this is the case: “a deferred tax liability that isn’t expected to reverse will have no future cash flow effects. The reversal of a deferred tax liability, however, increases income tax expense and taxes payable and reduces operating cash flow.” It seems to be that deferred tax liabilities are cash that has to go out the door in the future, and its its expected to reverse, that cash will now be available as operating cash flow. any help? thanks! (from schweser volume 1 exam 3 morning session questions 43-47)
stumped? me too
i meant to write, it seems to ME deferred tax liabilities are cash that has to go out the door in the future, and its its expected to reverse, that cash will now be available as operating cash flow… but i am wrong? why oh why am i wrong dear CFA?
ok you ready- so you have this tax liability that you need to pay sometime down the line. when this liability reverses, you have to start paying the taxes. you paying those taxes drops your CFO. so you’re cool today if it’s a DTL, but when this bad boy starts to reverse, then watch out CFO because you’re going to take a hit. but if the firm keeps growing and growing and growing and maybe you just aren’t ever going to find that time down the road where the thing reverses, we as analysts can pretty much say that DTL is as good as equity. hope that helps. it’s talking about the future it seems, not today, in your example?
put in precisely the language i was hoping for. thanks