Section A – External Financial Reporting

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  • #245660

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    Abdullah Mohammed Farrah
    Participant

     “” Garnett Company’s year-end income statement shows the following.

     1-Revenues  $5,000,000
     2-Selling and general expenses (including
       depreciation expense of $200,000)
    3,800,000
     3-Interest expense 50,000
     4-Gain on sale of equipment 40,000
     5-Income tax expense (including long-term
        deferred tax expense of $30,000)
    <u>    320,000</u>
     6-Net income $  870,000

    During the year, Garnett’s noncash current assets rose by $100,000, and current liabilities increased by $150,000. On its statement of cash flows, Garnett would report Cash Provided by Operating Activities of “”

    hello 

    this is Question from test bank ID: ICMA 13.P2.2055 (Topic: The Indirect Method)

    from information # 5 it show Increase in long-term deferred tax liability 

    what is the key word to distinguish what ever increase or decrease in deferred tax 

     

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  • #245661

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    Lynn Roden
    HOCK international

    Hello Abdullah Mohammed Farrah,

    In order to understand how that affects cash provided by operating activities in the SCF, you need to understand how deferred taxes are accounted for.  Deferred tax expense is a debit to Income Tax Expense (increases expense on the income statement) and a credit to Deferred Tax Liability (increases liabilities on the balance sheet) because it represents income taxes the company is committed for but does not need to pay just yet. In other words, Garnett Company reported $320,000 of income tax expense in its income statement, but it needed to pay only $290,000 of it this year. Since net income was reduced by the full $320,000, by adding the $30,000 deferred tax expense we are recognizing that that portion of the income tax expense was not paid in cash this year.

    Therefore, for calculating cash provided by operating activities under the indirect method, deferred tax expense is treated the same way any increase in liabilities is treated: an increase to a liability increases cash provided by operating activities by the amount of the increase.

    Deferred taxes are covered in your CMA Part 1, Vol. 1 textbook in Study Unit 20 in Section A beginning on page 132 in the current edition.

    Lynn

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