Question 1

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

Accepted Answer

Operating taxes are calculated by assuming that the company is financed solely with equity. This is because operating taxes are taxes that a company has to pay regardless of its financing structure or the type of capital it uses, such as debt or equity. Therefore, operating taxes are not affected by the way a company finances its operations.

Question 2

With respect to deferred taxes,which of the following is an operating entry?&#10;A)Tax loss carryforwards.&#10;B)Accelerated depreciation.&#10;C)Nondeductible intangibles.&#10;D)Pension and postretirement benefits.

Accepted Answer

Accelerated depreciation is an operating entry that affects deferred taxes. It results in a timing difference between book depreciation and tax depreciation, and therefore creates a deferred tax liability. The other choices (A, C, and D) are non-operating entries that result in deferred tax assets or liabilities, but they do not directly relate to the company's operations. For example, tax loss carryforwards and pension benefits are related to future tax benefits or obligations, but do not impact the company's revenues or expenses in the current period.

Question 3

In estimating a firm's cost of capital and value,which of the following is most accurate concerning marginal tax rates on nonoperating items?&#10;A)Both GAAP and the IFRS require that marginal tax rates on nonoperating items be reported,so it not a problem.&#10;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.&#10;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.&#10;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.

Accepted Answer

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. Therefore, the best choice is C.

Question 4

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.

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

Accepted Answer

I is false because operating taxes may involve estimation and could also be affected by changes in tax laws or regulations.

II is true because R&D expenses are not considered part of operations and are excluded from operating taxes calculations.

III is true because operating taxes are calculated as if the company were financed entirely with equity, meaning there is no debt to consider.

IV is false because estimating operating taxes based on tax rates in individual jurisdictions is a commonly used method, though it may not always be accurate due to factors such as local tax incentives or exemptions.

Question 5

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

When a company acquires another company, any excess purchase price paid over the fair value of the acquired company's net assets is recorded as goodwill on the acquiring company's balance sheet. This goodwill is considered an intangible asset and is subject to amortization over its useful life. As the goodwill amortizes, the deferred tax liability (DTL) associated with the amortization is reduced, as the amortization expense reduces the company's taxable income and ultimately reduces the amount of taxes owed. Therefore, it is true that a company will record a DTL during the year of an acquisition and draw it down as the intangible amortizes.

Question 6

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

Accepted Answer

Research and development expenditures (and tax credits) are a normal part of operations.

Question 7

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

Accepted Answer

Deferred tax liabilities can be classified as either debt (if they are nonoperating) or equity (if they are operating) equivalents.

Question 8

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

The answer of Identify warranty reserves as operating or nonoperating...

Question 9

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

Accepted Answer

Tax rates across jurisdictions can vary widely, so it is important to apply the appropriate rates to income earned in different jurisdictions.

Question 10

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

Starting with reported taxes and adjusting for financing and nonoperating items is the most comprehensive method for computing operating taxes from public data. This approach ensures that only taxes related to the company's core operations are considered.

Question 11

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?

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

Accepted Answer

The answer of Multinational Co.(MNC )generated $1,000 million in domestic...

Question 12

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

Accepted Answer

The answer of The income tax footnote is a good...

Question 13

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).

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

Accepted Answer

The answer of Which of the following concerning deferred taxes...

Question 14

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.

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

Accepted Answer

The answer of Which of the following are operating deferred...

Question 15

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

Accepted Answer

The answer of It is not correct to use the...

Question 16

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

Accepted Answer

The answer of As a general rule,deferred tax assets and...

Question 17

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

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

Accepted Answer

The answer of Which of the following are deferred tax...

Deck 18: Taxes