Deffered tax question, please help.

Hi, If deferred taxes is classified as a liability or equity, will the change in net income affect return on equity and return on assets? Somehow, the book that I am reading is telling me that the ratio lease likely to be affected is Return on assets, which I am confused about. A) Return on equity (ROE). B) Return on assets (ROA). C) Debt-to-total assets.

Deferred taxes can be an asset of a liability When you pay the gov more taxes than you should have paid due to diff bettwen tax law and accounting rules. Thats an asset. The reverse is a liability… In level I the chapter about taxes does a very good job, most people find it hard, but it realy is not. I suggest you read it… I have seen instances where deferred tax asset or liabilities are reffered to as “deferred taxes”. I realy dont know what to make out of it in such cases. They are obviously being neted, but which is being neted out of which !!!

I’m having trouble understanding the question…can you find a problem or specific reference?

The exact wording of the question is as follow; Which of the following financial ratios is least likely to be affected by classification of deferred taxes as a liability or equity? A) Return on equity (ROE). B) Return on assets (ROA). C) Debt-to-total assets. Can somebody please explain to me why the answer was B? Thank you in advance!

this seems a pretty weird question to me. But I guess if deferred taxes were treated as a liability, that would affect debt-to-total assets (by adding to the numerator). if they are treated as equity, that would change the ROE calculation. therefore the answer has to be B, because neither net income nor average total assets (the ROA calculation) would be affected by a change to liabilities or equity. I’m just guessing though, and taxes aren’t my strong point…

well you know debt/assts will be affected b/c if you classify it as a liability, then that affects the numerator there. if treated as equity like Kiakaha said, that affects ROE So It must be B. Weird question though but certainly possible.

Thanks for responding guys. I am wondering how does a tax liability be treated as a debt? I didn’t think that all liabilities were debts (trade payables, pending fees, etc.). If that’s the case, how does the debt to total assets be affected?

Total debt is defined differently depending on the person but for this case, all you have to know is it is a LIABILITY (you’re going to have to pay off this tax difference), and liabilities are treated as debt, and hence affect debt/equity