SD13-Using Income Tax Information

SD13-Using Income Tax Information - CHAPTER 13 USING INCOME...

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CHAPTER 13 USING INCOME TAX INFORMATION LEARNING OBJECTIVES 1. The differences between statutory, marginal, and effective tax rates. 2. The basic financial reporting and disclosure standards for income taxes. 3. What loss carrybacks and loss carryforwards are. 4. How loss carryforwards affect a valuation. 5. How to use the income tax footnote to gather information for a valuation analysis. 6. How to calculate the effective tax rate on core operations. TRUE/FALSE QUESTIONS 1. Since most companies operate in many states, the reported state tax burden will be an average state rate (net of any federal benefit) for all the states in which the firm operates. (easy, L.O. 1, Section 1, true) 2. The current federal statutory tax rate for major corporations is currently 35%, which was increased from 34% in 1994. (moderate, L.O. 1, Section 1, true) 3. In valuation forecasts analysts use the income tax rate that is related to core operations, divided by pretax income related to core operations. (moderate, L.O. 1, Section 1, true) 4. Book-tax conformity means the same accounting methods and estimates must be used for both financial accounting and income tax calculations. (moderate, L.O. 2, Section 2, true) 5. Expense under SFAS No. 106 for a postemployment benefit plan recorded over employment life for GAAP is an example of a permanent difference for tax purposes. (difficult, L.O. 2, Section 2, false) 6. Municipal bond interest is an example of a temporary difference. (easy, L.O. 2, Section 2, false) 7. Deferred taxes arise when a firm chooses different accounting methods for financial reporting and income tax reporting purposes. (moderate, L.O. 2, Section 2, true) 8. Because the amount of deferred taxes is not paid in the current period, it is not a reconciling item on the cash flow statement. (moderate, L.O. 2, Section 2, false) 9. Since the deferred tax provision is due to temporary differences, it is reported in the firm’s income statement for the period in which the differences occur. (easy, L.O. 2, Section 2, false) 10. Most firms elect to carry losses forward to future periods since it will allow future tax savings. (moderate, L.O. 3, Section 3, false) 11. A loss carryforward is recorded as a deferred tax asset in the year of the loss. (moderate, L.O. 2, Section 4, true) 84
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12. The part of the income tax footnote known as the tax provision summary shows temporary differences that have not yet reversed as of the balance sheet date. (moderate, L.O. 4, Section 5, false) 13. When a firm owns more than 20% of another firm from which it receives dividend income, 20% of the dividend income it receives is permanently excluded for tax purposes. (moderate, L.O. 6, Section 6, false) 14. Just as important as what is disclosed in an income tax reconciliation footnote is what is not there.
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This note was uploaded on 11/22/2010 for the course CAC BSA taught by Professor Kairus during the Spring '10 term at Korea University.

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SD13-Using Income Tax Information - CHAPTER 13 USING INCOME...

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