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ACFM 322 Exam 2
| Term | Definition |
|---|---|
| Why are there often differences between "accounting income" and "taxable income"? | Different objectives U.S. GAAP - reporting to investors & Govt - reporting to the govt so they get their share |
| Temporary Differences | Differences between taxable income and pretax accounting income that occur when tax rules and accounting rules recognize income in different periods; they originate in one period and reverse in one or more subsequent periods |
| Deferred Tax Liabilities (DTLs) | These exist when tax laws allow a company to postpone paying taxes on activities reported in the current period's income statement; the company anticipates those activities will lead to future taxable amounts |
| Deferred Tax Assets (DTAs) | These exist when tax laws require a company to pay more tax than is indicated by the activities reported in the current period's income statement; they reflect the benefit of future deductible amounts |
| 1. Calculate tax payable based on current year's tax return 2. Calculate ending balances for DTAs & DTLs 3. Calculate changes in DTAs & DTLs 4. Plug income tax expense | What are the 4 Steps to Determine Income Tax Expense? |
| Installment sales of property, unrealized gain from recording investments at fair value, accelerated depreciation, prepaid expenses | Examples of DTLs |
| Estimated expenses & losses, unrealized loss from recording investments at fair value or inventory at LCM, and rent, subscriptions, and other revenue collected in advance | Examples of DTAs |
| DTL | When Book > Tax |
| DTA | When Book < Tax |
| Book Side | These terms refer to what: US GAAP, accounting income, income tax expense, financial statement reporting, carrying value, book value, and net income |
| Tax Side | These terms refer to what: US Tax Law, taxable income, income tax payable, and tax basis |
| Taxable | Use _________ income to determine income tax payable |
| Accounting Records | Use __________ _________ income, if given, to determine income tax expense |
| Deferred Tax Liability | Each year is the tax rate times the temporary difference between the financial statement carrying amount of the receivable and its tax basis |
| Depreciation Expense | To determine taxable income, add back to pretax accounting income any __________ ________ on the income statement, then subtract tax deduction for depreciation on the tax return |
| Tax Basis | Of an asset or liability is its original value for tax purposes, reduced by any amounts deducted to-date on tax returns |
| Valuation Allowance | If it is more likely than not that some or all of a DTA will NOT be realized, a __________ __________ is needed |
| Contra Asset | It is a _________________ that is recorded with a corresponding increase to income tax expense |
| Key Factor | The ______ _________ is whether there will be sufficient future taxable income for the benefit to apply |
| Net | Report on the balance sheet as a ______ amount |
| US GAAP: Record DTA, then record valuation allowance if needed IFRS: Can only recognize when it happens, no prior DTA recorded | Difference Between US GAAP & IFRS |
| Permanent Differences | "Book-tax" income differences that will NOT reverse in a later year |
| Interest on state & local bonds, life insurance premiums/proceeds, legal fines/penalties, certain dividends from U.S. Corps, compensation expense (ESOP) | Examples of Permanent Differences |
| No | Is a DTA or DTL created for permanent differences? |
| Increase | A permanent difference that reduces pretax income will ____________ the effective tax rate |
| Reduce | A permanent difference that increases pretax income will _________ the effective tax rate |
| Tax Rate Considerations | Only recognize enacted tax rates; in the year of a rate change, DTLs & DTAs should be adjusted, with the effect shown in Income Tax Expense |
| Net Operating Loss (NOL) | Negative taxable income, where tax-deductible expenses exceed taxable revenues |
| NOL Carryforward | Offsets future taxable income as a future deduction; max 80% of taxable income in a given year, can carryforward indefinitely; recognized as a DTA |
| Non-Current | All DTLs, DTAs, and any valuation allowance against DTAs are classified as _______________ in the balance sheet |
| Netted | When deferred tax accounts relate to the same tax-paying component of a company and the same tax jurisdiction, they are __________ |
| Income tax expense, list DTL & DTA & the why, NOL (remaining balance), effective tax rate reconciliation | Disclosure Notes include: |
| 1. Tax benefits may only be reflected in financials for a questionable position if it is more likely than not (> 50%) that the position will be sustained if challenged 2. Tax benefits should be measured as the largest amount of benefit | Uncertainty in Income Taxes 2 Step Decision Process |
| Liability - Uncertain Tax Positions | If step 1 is not met, debit full tax expense amount, credit uncertain portion as ________________________ |
| Liability - Uncertain Tax Positions | If step 2 results in a difference, record taxes & credit the difference to ________________________ |
| Defined Contribution & Defined Benefit | What are the 2 types of pension plans? |
| Defined Contribution Pension Plan | Promises a fixed contribution amount to a pension fund, and employees can choose where the funds are invested; retirement pay depends on the size of the fund at retirement; employee contributing, 401k, 403B, "Retirement Plan" |
| Defined Benefit Pension Plan | Promises a fixed retirement benefit, usually defined by a formula based on a combination of the following factors; years of service, compensation, age; "Traditional Pension" |
| Employers obligation to pay benefits in the future Plan assets set aside to pay benefits in the future Periodic expense of having a pension plan | What are the 3 key elements of a defined benefit plan? |
| Risk, government regulations, new hires over loyalty | Why are the defined benefit pensions less common? |
| Statement of Net Assets Available for Benefits Statement of Changes in Net Assets Available for Benefits | What are the 2 required financial statements? |
| Required Cash Contributions | For defined contribution plans, pension expense equals _________________________________ |
| Pension Obligation & Plan Assets | For defined benefit plans, pension expense includes changes in the ________________________ & the __________________ |
| + Service Cost + Interest accrued on the pension liability - Return on the plan assets Amortized Portion of: + Prior Service Cost +/- Losses or (Gains) = Pension Expense | What are the components and equation for pension expense? |
| Actuary | Firms with defined benefit plans usually hire an ______________. who has the statistical training necessary to assess various types of uncertainty |
| Vested Benefits | Those that employees have the right to receive even if their employment ceased today |
| Employee Retirement Income Security Act (ERISA) | Federal law passed in 1974; provides minimum standards to protect employees' retirement and health plans and established the PBGC, a guaranty corporation for pension benefits |
| Accumulated Benefit Obligation Vested Benefit Obligation Projected Benefit Obligation | What are the 3 ways to measure pension obligations? |
| Accumulated Benefit Obligation | Actuary's estimate of total retirement benefits earned so far by employees, applying the pension formula using existing compensation levels (current salary levels) |
| Vested Benefit Obligation | The portion of the ABO that plan participants are entitled to receive regardless of their continued employment |
| Projected Benefit Obligation | ABO but with estimated future compensation levels (future salary levels) |
| Assets = Liabilities + Owners' Equity or Assets-Liabilities = Owners' Equity | What is the accounting equation? |
| Amounts Invested by Shareholders (PIC) Amounts Earned by the Corporation (RE) | What are the 2 sources of ownership interests? |
| Common Stock Retained Earnings Accumulated Other Comprehensive Income Treasury Stock | What are the 4 potential components of shareholders' equity? |
| Common Stock | Amounts invested by shareholders when they purchase a company's stock, or from that company buying back some of those shares, or from share-based compensation activities |
| Retained Earnings | A corporation's accumulated, undistributed, or reinvested net income (or net loss) |
| Accumulated Other Comprehensive Income (AOCI) | Cumulative sum of the changes in each component of OCI accumulated over both current and prior periods |
| Treasury Stock | Shares of previously-issued stock that have been repurchased but not retired by a corporation |
| Statement of Stockholders' Equity | Changes in these accounts are reported in the ____________________________ |
| Retained Earnings in the Statement of Stockholders' Equity | If no/few changes, report changes ONLY to ___________ in a ____________________________ |
| Corporations are a separate legal entity Limited Liability Ease of raising equity capital Not a mutual agency relationship | What are the characteristics of corporations? |
| Lots of regulation Double taxation | What are the disadvantages of corporations? |
| Nature of the firm's business activities Shares to be issued Composition of the initial board of directors | What do the Articles of Incorporation describe? Hint there are 3 |
| Right to vote Right to share in profits when dividends are declared Right to share in distribution of assets upon liquidation Preemptive Right-right to maintain % share ownership when new shares are issued | What ownership rights are held by common shareholders? |
| First right to a specified amount or percentage of dividends, if dividends are paid Preference to distribution of assets if the company is dissolved | What are the typical rights of preferred shares? |
| Right of Conversion Redemption Privilege Cumulative or Non-Cumulative Participating or Non-Participating | What are the other possible characteristics of preferred shares? |
| Liability | A mandatorily redeemable financial instrument must be reported in the balance sheet as a ______________ |
| Fair Value | When shares are issued for noncash consideration, record the transaction at _________________ |
| Cash, & APIC | Share issue costs reduce net ______ proceeds and _________ |
| Deficit | A debit balance in retained earnings is called a __________ |
| Dividends | Distributions of assets a company generates on behalf of shareholders |
| Liquidating Dividend | When a dividend exceeds the balance in Retained Earnings, debit the excess to APIC, not RE |
| Declaration Date (liability) -> Ex-Dividend Date -> Date of Record (list) -> Payment Date (payment) | What are the important dates in order regarding dividends? |
| Property Dividend | When dividends are paid with an asset other than cash |
| Stock Dividend | Distribution of additional shares of stock to current shareholders of a corporation |
| As a "large" stock dividend As a stock split | A stock distribution of 25% or more can be accounted for in 2 ways: |
| RE to PIC | For small (25% or less) stock dividends, FV of additional shares is transferred from _____ to ________ |
| Repurchased Shares | Can be either be retired or viewed as treasury stock |
| Average Value Per Share | To record, reduce the accounts originally used based on the current ___________________________________ |
| Issued | Retired shares are considered authorized, but not _____________ |
| PIC-SR | If a credit difference is created, credit ______________________________ |
| Buyback for Less | When there is a credit difference, you ____________________________ |
| Retained Earnings | If a debit difference is created, debit PIC-SR, but only if that account already has a credit balance...otherwise, debit ___________________ |
| Buyback for More | When there is a debit difference, you _____________________________ |
| Treasury Stock | Viewed as a temporary reduction of shareholders' equity, to be reversed when it is resold |
| Contra-Equity | Treasury stock is a __________________ account |
| Outstanding | Treasury stock is considered issued, but not ____________________ |
| Single Transaction | Buying and then selling treasury stock is viewed as a _______________________________________ |
| Authorized (allowed) Issued (sold, maybe outstanding, maybe treasury) Outstanding (sold, held, and owned by someone other than the corporation) | What are the 3 classifications of stock? |
| Common Stock + Preferred Stock + APIC - CS & PS Less: Treasury Stock = Retained Earnings | What is the equation to find owners' equity? |
| No | Does treasury stock have an effect on the income statement? |
Created by:
MOWGaming04
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