Question 1

The income tax footnote is a good source of information for deferred tax liabilities.

Accepted Answer

A) True 
 B)False  True

Question 2

Which of the following concerning deferred taxes classified as nonoperating are true?
I.They will not be included in a discounted free cash flow (FCF )valuation.
II.They can be valued as part of their corresponding accounts (as in the case of pensions).
III.They can be valued separately (as in the case of net operating loss carryforwards).
IV.They can be ignored as accounting conventions (as in the case of nondeductible amortization).

Accepted Answer

A) I and II only. 
B) II and III only. 
C) II and IV only. 
D) I,II,III,and IV. 
A) I and II only. 
B) II and III only. 
C) II and IV only. 
D) I,II,III,and IV. D

Question 3

Which of the following concerning operating taxes are true?
I.With full information,operating taxes can be computed without error.
II.The effects of research and development (R&D )should be removed from operating taxes.
III.Operating taxes are computed as if the company were financed entirely with equity.
IV.Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.

Accepted Answer

A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only. 
A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only. B

Question 4

Which of the following are deferred tax assets (DTAs)?
I.Warranty reserves.
II.Tax loss carryforwards.
III.Nondeductible intangibles.
IV.Pension and postretirement benefits.

Accepted Answer

A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only. 
A) I and II only. 
B) I and III only. 
C) II and III only. 
D) III and IV only.

Question 5

Which of the following are operating deferred tax assets or deferred tax liabilities?
I.Nondeductible intangibles.
II.Tax loss carryforwards.
III.Accelerated depreciation.
IV.Pension and postretirement benefits.
V.Warranty reserves.

Accepted Answer

A) I,II,and IV. 
B) III and V. 
C) I,III,and V. 
D) II,IV,and V. 
A) I,II,and IV. 
B) III and V. 
C) I,III,and V. 
D) II,IV,and V.

Question 6

Usually,a company will record a DTL during the year of an acquisition and then draw down the DTL as the intangible amortizes.

Accepted Answer

A) True 
 B)False

Question 7

Identify warranty reserves as operating or nonoperating and as an asset or a liability.Explain how the required treatment of warranty reserves determines the relationship between cash and accrual-based taxes.

Accepted Answer

Warranty reserves are an operating defer

Question 8

The most comprehensive method for computing operating taxes from public data is to begin with reported taxes and undo financing and nonoperating items one by one.

Accepted Answer

A) True 
 B)False

Question 9

Operating taxes are computed as if the company were financed entirely with equity.

Accepted Answer

A) True 
 B)False

Question 10

Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.

Accepted Answer

A) True 
 B)False

Question 11

With respect to deferred taxes,which of the following is an operating entry?

Accepted Answer

A) Tax loss carryforwards. 
B) Accelerated depreciation. 
C) Nondeductible intangibles. 
D) Pension and postretirement benefits. 
A) Tax loss carryforwards. 
B) Accelerated depreciation. 
C) Nondeductible intangibles. 
D) Pension and postretirement benefits.

Question 12

As a general rule,deferred tax assets and deferred tax liabilities are considered part of invested capital.

Accepted Answer

A) True 
 B)False

Question 13

It is not correct to use the company's effective tax rate with no adjustments when estimating operating taxes.

Accepted Answer

A) True 
 B)False

Question 14

The effects of research and development should be removed from operating taxes.

Accepted Answer

A) True 
 B)False

Question 15

All deferred tax liabilities (DTLs )are classified as debt.

Accepted Answer

A) True 
 B)False

Question 16

Multinational Co.(MNC )generated $1,000 million in domestic earnings before interest,taxes,and amortization (EBITA).MNC amortizes intangible assets at $200 million per year and takes a $300 million interest expense.MNC's statutory (domestic )tax rate is 34 percent on earnings before taxes,but only 24 percent on foreign operations.MNC had $100 million of pretax foreign income and generates $20 million in ongoing research and development (R&D )tax credits.What is its effective tax rate on pretax profits?

Accepted Answer

A) 26.7 percent. 
B) 29.0 percent. 
C) 31.5 percent. 
D) 33.3 percent. 
A) 26.7 percent. 
B) 29.0 percent. 
C) 31.5 percent. 
D) 33.3 percent.

Question 17

In estimating a firm's cost of capital and value,which of the following is most accurate concerning marginal tax rates on nonoperating items?

Accepted Answer

A) Both GAAP and the IFRS require that marginal tax rates on nonoperating items be reported,so it not a problem. 
B) Marginal tax rates on nonoperating items are usually not reported,but in most cases an analyst can ignore them because they are so small. 
C) Marginal tax rates on nonoperating items are usually not reported,and an analyst will have to make an assumption about the tax jurisdiction in which nonoperating items are held. 
D) IFRS requires that marginal tax rates on nonoperating items be reported,and an analyst estimating the value of a company that uses GAAP can use approximations from similar firms using IFRS for such marginal tax rates. 
A) Both GAAP and the IFRS require that marginal tax rates on nonoperating items be reported,so it not a problem. 
B) Marginal tax rates on nonoperating items are usually not reported,but in most cases an analyst can ignore them because they are so small. 
C) Marginal tax rates on nonoperating items are usually not reported,and an analyst will have to make an assumption about the tax jurisdiction in which nonoperating items are held. 
D) IFRS requires that marginal tax rates on nonoperating items be reported,and an analyst estimating the value of a company that uses GAAP can use approximations from similar firms using IFRS for such marginal tax rates.

Exam 18: Taxes

The income tax footnote is a good source of information for deferred tax liabilities.

Which of the following are deferred tax assets (DTAs)? I.Warranty reserves. II.Tax loss carryforwards. III.Nondeductible intangibles. IV.Pension and postretirement benefits.

Which of the following are operating deferred tax assets or deferred tax liabilities? I.Nondeductible intangibles. II.Tax loss carryforwards. III.Accelerated depreciation. IV.Pension and postretirement benefits. V.Warranty reserves.

Usually,a company will record a DTL during the year of an acquisition and then draw down the DTL as the intangible amortizes.

Identify warranty reserves as operating or nonoperating and as an asset or a liability.Explain how the required treatment of warranty reserves determines the relationship between cash and accrual-based taxes.

The most comprehensive method for computing operating taxes from public data is to begin with reported taxes and undo financing and nonoperating items one by one.

Operating taxes are computed as if the company were financed entirely with equity.

Making estimates of operating taxes based on tax rates in individual jurisdictions is not recommended.

With respect to deferred taxes,which of the following is an operating entry?

As a general rule,deferred tax assets and deferred tax liabilities are considered part of invested capital.

It is not correct to use the company's effective tax rate with no adjustments when estimating operating taxes.

The effects of research and development should be removed from operating taxes.

All deferred tax liabilities (DTLs )are classified as debt.

In estimating a firm's cost of capital and value,which of the following is most accurate concerning marginal tax rates on nonoperating items?

Why Value Value

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The Alchemy of Stock Market Performance

The Stock Market Is Smarter Than You Think

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Non-operating Items, Provisions, and Reserves

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Alternative Ways to Measure Return on Capital

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Cross-Border Valuation

Case Study: Heineken

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