The following information was extracted from the financial statements of a company for the current year ($ millions): Earnings before taxes $245 Income tax expense 31 Net income 214 Effective tax rate 12.6% Statutory tax rate 45.0% Net deferred tax asset - Beginning balance 56 - Ending balance 135 Change in valuation allowance $ (79) The net income amount that is most likely to be used by an analyst in evaluating the company’s operating performance is closest to: a. $135 b. $163 c. $214 d. $265 - Dinesh S
A Reason is the 79M which is the change in the DTA is also completely the change in the Valuation Allowance. So company is increasing the DTA and also completely writing the same off by increasing the valuation allowance. In this circumstance - the NI must be reduced by the value of the Valuation allowance. So NI = 214 - 79 = 135. Choice A
Perfect cpk!! - Dinesh S
Tax payable = Income tax expense + delta DTA = 31 + (135 - 56) = 110 Net Income used by analyst = Earnings before tax - Tax payable = 245 - 110 = 135 Any mistake in my calculation?