Tax Fun

CFA Level I
#1

During 20X7 a company unexpectedly realizes the benefits of a temporary difference in reporting warranty expenses for book and tax purposes as a result of returning to profitability earlier than expected. Assuming that the company had reduced the carrying value of its reported deferred tax assets on its December 31, 20X6 balance sheet by recognizing a valuation allowance, the most likely effects of the realization of the tax benefit in 20X7 will include: After-tax Net Income Cash Flow a. Increase No effect b. Increase Increase c. No effect Increase d. No effect No effect

#2

C i suk at taxes i know that warr exp creates DTAs b/c tax paid to IRS is > than tax exp on income stmt

#3

B.

#4

B

#5

B…but at taxes i am not good at all

#6

explain fellas!!!

#7

The answer is ‘B.’ U.S. GAAP requires that the carrying value of a deferred tax asset (DTA) be reduced by a valuation allowance when an analysis of future sources of taxable income indicates it is likely that some portion or all of the DTA will not be realized. In the scenario described, the company has recorded such an allowance on its 20X6 balance sheet. The effect of this allowance was to increase 20X6 income tax expense and reduce reported net income. When the tax benefits are unexpectedly realized in 20X7, the impact will include a reduction in the valuation allowance, lower income tax expense, and higher reported net income. Had the valuation allowance not been recorded in 20X6, there would be no effect on income tax expense or net income as a result of realizing the tax benefits. In either situation, after-tax cash flow will increase as a result of the tax savings from higher reported warranty expenses for tax purposes (vs. financial reporting).

#8

i think it’s B.

#9

Good explanation sharp

#10

> U.S. GAAP requires that the carrying value of a > deferred tax asset (DTA) be reduced by a valuation > allowance when an analysis of future sources of > taxable income indicates it is likely that some > portion or all of the DTA will not be realized. > In the scenario described, the company has > recorded such an allowance on its 20X6 balance > sheet. The effect of this allowance was to > increase 20X6 income tax expense and reduce > reported net income. When the tax benefits are > unexpectedly realized in 20X7, the impact will > include a reduction in the valuation allowance, > lower income tax expense, and higher reported net > income. Had the valuation allowance not been > recorded in 20X6, there would be no effect on > income tax expense or net income as a result of > realizing the tax benefits. In either situation, > after-tax cash flow will increase as a result of > the tax savings from higher reported warranty > expenses for tax purposes (vs. financial > reporting). thanks : ) -

#11

thanks, but in accordance with the CFA standards of professional conduct i’m going to have to disclose to you that the explanation was taken straight from stalla passmaster also i don’t really get it