Which of the following temporary differences will result in a deferred tax asset?
Answer(s): E
A deferred tax asset records deferred tax consequences attributable to deductible temporary differences.Advance rental receipts accounted for on the accrual basis for accounting purposes and on a cash basis for tax purposes would give rise to a deferred tax asset. The income statement would show no revenue and no related tax expense. However, on the tax return, the cash received is reported as revenue and the tax would be due now, resulting in a prepaid tax on the balance sheet called a deferred tax asset.
Jumbotron's accountant has mistakenly understated depreciation by 125 and understated accounts payables by 65. Jumbotron's tax rate is 40%. Which of the following is/are true?
Answer(s): B
If depreciation is understated by 125, the income is actually overstated by 125*(1-tax rate) = 75. The understatement of accounts payables does not affect the income statement; it understates the reported current liabilities. It also affects the operating cash flow. Note that operating cash flow = net income + noncash expenses - non-cash revenues - cash reductions in operating accounts Since income is overstated by 75, a non-cash expense (depreciation) is understated by 125 and another non-cash expense (accounts payable) is understated by 65, operating cash flow is understated by -75 + 125 + 65 = 115.
When merchandise inventory is purchased under a periodic system, which account is debited?
Answer(s): D
The periodic inventory system records purchases of merchandise inventory in an income statement account called Purchases.
The section of a firm's annual report entitled "Management's Discussion and Analysis" (MD&A)
Answer(s): C
The MD&A is included in SEC filings. It addresses in a nonquantified manner the prospects of a company. The SEC examines it with care to determine that management has disclosed material information affecting the company's future results.
Which of the following is/are FALSE?
Depreciation does affect cash flows since it reduces the amount of income tax paid. Further, US firms have the latitude of choosing an accelerated method of depreciation for tax purposes and a different method (like straight-line method) for financial reporting. This flexibility has an important effect on the reported balance sheet, which has to recognize an explicit liability in the form of deferred taxes payable.
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