Deck 5: The Statement of Cash Flows

Question 1

"Taxable amounts" include expenses and losses that are included in the tax return BEFORE they are recognized for accounting purposes.

Answer 1

False

Question 2

Permanent differences are those that factor into the computation of both net income and taxable income.

Answer 2

False

Question 3

Temporary differences very seldom reverse (i.e.,turnaround)in one or more future reporting periods.

Answer 3

False

Question 4

Under IFRS,the amount of taxes paid must be disclosed on the face of the cash flow statement.

Question 5

Deferred taxes appear on a company's balance sheet as a result of inter-period tax allocation.

Question 6

The phrase "provision for income taxes" encompasses both income tax expenses and liabilities.

Question 7

During the originating period of a temporary difference,pre-tax accounting income is defined as taxable income plus taxable amounts minus deductible amounts.

Question 8

Deferred income tax liabilities are amounts owed to the government.

Question 9

Deferred taxes may be classified as either current or non-current under IFRS.

Question 10

The use of inter-period income tax allocation is mandatory under ASPE.

Question 11

"Taxable amounts" include revenues and gains that are included in the tax return BEFORE they are recognized for accounting purposes.

Question 12

Temporary differences relate only to items that will be recognized on both the income statement and the tax return,but in different reporting periods.

Question 13

The taxes payable method results in better matching than does the comprehensive allocation method.

Question 14

All temporary differences are related to differences in the timing of accounting recognition compared with income tax recognition.

Question 15

Netting of deferred income tax assets and liabilities is always forbidden under IFRS and ASPE.

Question 16

Under the indirect method of preparing cash flows from operating activities,deferred income tax expense must be added back to net income.

Question 17

Prepayments of Deferred income tax expense may be viewed as a deferred tax asset.

Question 18

Income tax expense generally equals the product of the current period income tax rate and pre-tax accounting income.

Question 19

Deferred taxes must be discounted under IFRS.

Question 20

Temporary differences occur only because accounting standards and income tax laws differ as to when they recognize assets,liabilities,owners' equity,revenues,gains,expenses,and losses.

Question 21

Income tax expense for continuing operations and discontinued operations must be disclosed separately on the income statement.

Question 22

On January 1,Year 2,GHI Inc.had depreciable assets with a book value of $920,000 and a historical cost of $1,000,000.CCA totalling $100,000 had been taken on these assets.During Year 2,depreciation of $80,000 and CCA of $20,000 had been taken on these assets.The tax rate in effect is 35%.For Year 2,the temporary differences arising from the above would result in:

A) a decrease to income tax expense of $21,000.
B) an increase to income tax expense of $7,000.
C) a decrease to income tax expense of $7,000.
D) a decrease to income tax expense of $14,000.

Question 23

Company A had depreciation of $14,000 and CCA of $12,500 during its first year of operations.The tax rates for Years 1 and 2 were 25% and 20% respectively.The Year 2 tax rate was enacted in Year 2.At the end of year 1,this will result in:

A) a deferred income tax asset of $300.
B) a deferred income tax liability of $300.
C) a deferred income tax asset of $375.
D) a deferred income tax liability of $375.

Question 24

Amanda Company sold an asset and as a result had a capital gain of $15,000.Fifty percent of this amount represents a permanent difference.

Question 25

ABC Co.in its first year of business has taxable income of $2,000,book depreciation of $3,000 and CCA of $4,600,and recognized $800 of warranty expense but performed no warranty service.ABC's pre-tax accounting income would be:

A) $1,200
B) $2,000
C) $2,800
D) $3,600

Question 26

Company A had depreciation of $14,000 and CCA of $12,500 during its first year of operations.The tax rates for Years 1 and 2 were 25% and 20% respectively.The Year 2 tax rate was enacted in Year 1.At the end of year 1,this will result in:

A) a deferred income tax asset of $300.
B) a deferred income tax liability of $300.
C) a deferred income tax asset of $375.
D) a deferred income tax liability of $375.

Question 27

All individual temporary differences are expected to fully reverse over time.

Question 28

Under the liability approach,deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporary differences reverse.

Question 29

For inter-period tax allocation,the total income tax expense must be allocated to ongoing operations,discontinued operations and extraordinary items on the income statement.

Question 30

Under the deferral approach,deferred taxes on the balance sheet are valued at the tax rate in that will be in effect when the temporary differences reverse.

Question 31

Financial analysts tend to ignore deferred taxes when computing the effective tax rate.

Question 32

Under the comprehensive allocation method,deferred tax assets and liabilities are valued at the tax rates that are expected to be substantially enacted in the year of reversal.

Question 33

If a company incurs $1,500 of expenditures for meals and entertainment,this amount represents a permanent difference.

Question 34

OCI elements are shown on the statement of comprehensive income on a pre-tax basis.

Question 35

Comprehensive allocation recognizes the amount of taxes assessed in each year as the income tax expense for that year.

Question 36

All temporary differences originate,then reverse,and eventually end with a zero net effect.

Question 37

The existence of deferred tax assets on the balance sheet is dependent on a company's going concern status.

Question 38

In Canada,tax rates are usually enacted in the year to which they pertain.

Question 39

If the enacted tax rate is changed for the current and future years,the earnings effect of the change in the beginning balances of the deferred tax assets is recognized in the current year.

Question 40

Ryan Company paid the golf dues of one of its employees.This represents a temporary difference.

Question 41

Temporary differences can be dealt with in a number of different ways.The method recommended for public companies is the:

A) Flow-through method
B) Comprehensive Allocation Method.
C) Partial Allocation Method.
D) Taxes Payable Method.

Question 42

All of the following are all justifications for the use of the comprehensive allocation method except for:

A) Proponents say that a future cash flow impact arises from all temporary differences.
B) The matching principle is best served by using the comprehensive allocation method.
C) Income tax is an aggregate measure, applied to the overall operations of the company.
D) Proponents say that this provides a more accurate figure than does the comprehensive allocation method.

Question 43

At the end of 2014,the only expected future temporary difference is implied by the following account found in the balance sheet: The footnotes reveal that the prepaid rent applies only to 2015.You would also expect to find which of the following in the balance sheet:

A) Current deferred tax liability
B) Current deferred tax asset
C) Noncurrent deferred tax liability
D) Noncurrent deferred tax asset

Question 44

A taxable amount is exemplified by:

A) Revenue that is included in the tax return before it is included in pre-tax accounting income.
B) Gain that is included in the tax return before it is included in pre-tax accounting income.
C) Expense that is included in the tax return after it is included in pre-tax accounting income.
D) Expense that is included in the tax return before it is included in pre-tax accounting income.

Question 45

A characteristic of the taxes payable method is that:

A) Tax owed for the period will equal accounting income tax expense.
B) Inter-period income tax allocation is applied to some types of temporary differences but not all.
C) The matching principle is respected.
D) It is mandatory for private companies.

Question 46

Amanda Corporation incurred $10,000 of meals and entertainment expenses for the year ended December 31.The amount that is deductible for tax purposes is:

A) $5,000
B) $7,500
C) $10,000
D) $0

Question 47

A firm reported the following in its income statement for the current year: depreciation expense,$4,000; pollution violation fine,$12,000; pre-tax accounting income,$10,000.The tax rate is 40% for the current year,and no changes to this rate are foreseen in the near term.For tax purposes,the CCA deduction was $9,000.What amount of deferred income tax (benefit)expense will be recognized for this year? Assume a beginning Deferred Tax asset balance of $4,000.

A) A $2,000 deferred tax benefit.
B) A $2,000 deferred tax expense.
C) A $6,000 deferred tax benefit.
D) A $6,000 deferred tax expense.

Question 48

MNO's taxable income was $900 during 2013.MNO had product warranty costs of $360 recognizable for tax purposes and $400 recognizable for financial accounting purposes.MNO had no other temporary differences.MNO's pre-tax accounting income for 2013 would be:

A) $860
B) $900
C) $940
D) $1,260

Question 49

Which of the following would result in a deferred tax asset?

A) Using straight-line depreciation for the books and accelerated depreciation for tax.
B) Rent received in advance.
C) Warranty provision.
D) Point of sale revenue recognition for the books, and cost recovery method of revenue recognition for tax.

Question 50

During 2013,MJB has pre-tax accounting income of $8,400.There were no permanent differences.MJB's only temporary difference for 2013 was rent revenue collected in advance of $2,400.None of this amount is recognized for book purposes.MJB's taxable income for 2013 would be:

A) $6,000
B) $8,400
C) $9,600
D) $10,800

Question 51

The following data of ABC Ltd.relates to the current year: Compute taxable income for the year.

A) $13,000
B) $15,000
C) $17,000
D) $19,000
E) $11,000

Question 52

Ryan Company paid golf dues on behalf of their two top employees.This is an example of a:

A) Temporary difference
B) Reversing difference
C) Permanent difference
D) Fully deductible for income tax purposes

Question 53

At most,how many deferred tax accounts will a firm report in its balance sheet?

A) 1
B) 2
C) 3
D) 4

Question 54

The general terminology used to describe income tax expense when shown on the statement of comprehensive income is:

A) Income tax expense
B) Income tax benefit
C) Provision for income tax expense
D) Tax expense

Question 55

Golf dues paid for by a company are:

A) a temporary difference
B) a timing difference
C) a permanent difference
D) a reversing difference

Question 56

STR provided the following data related to income tax allocation: The deferred tax account showed a zero balance at the start of 2009.There was only one temporary difference,a revenue amount,which was taxable in 2009,but was recorded for accounting purposes in 2010.There are no carry backs or carry forwards.The journal entry to record the income tax consequences for 2009 would include a:

A) Debit of $400 to STR's deferred tax account.
B) Credit of $400 to STR's deferred tax account.
C) Debit of $136 to STR's deferred tax account.
D) Credit of $136 to STR's deferred tax account.

Question 57

A firm reported the following in its income statement for the current year: depreciation expense,$4,000; pollution violation fine,$12,000; pre-tax accounting income,$10,000.The tax rate is 40%.For tax purposes,the CCA deduction was $9,000.What amount of deferred income tax (benefit)expense will be recognized for this year? Assume no beginning deferred tax amounts and a constant tax rate of 40%.

A) A $2,000 deferred tax benefit.
B) A $2,000 deferred tax expense.
C) A $6,800 deferred tax benefit.
D) A $6,800 deferred tax expense.

Question 58

A deductible amount is exemplified by all of the following except:

A) Revenue that is included in the tax return before it is included in pre-tax accounting income.
B) Gain that is included in the tax return before it is included in pre-tax accounting income.
C) Expense that is included in the tax return after it is included in pre-tax accounting income.
D) Loss that is included in the tax return after it is included in pre-tax accounting income.
E) Expense that is included in the tax return before it is included in pre-tax accounting income.

Question 59

EGR just completed its first year end.During the year,EGR recorded $12,000 in depreciation ($18,500 CCA).In addition there was a deduction in the accounting records for meals and entertainment amounting to $6,000.As a result taxable income will:

A) be higher than accounting income by $5,500.
B) be lower than accounting income by $500.
C) be higher than accounting income by $500.
D) be lower than accounting income by $5,500.
E) be equal to accounting income.

Question 60

A firm reported the following in its income statement for the current year: depreciation expense,$4,000; pollution violation fine,$12,000; pre-tax accounting income,$10,000.The tax rate is 40%.For tax purposes,the CCA deduction was $9,000.What amount of CURRENT income tax expense will be recognized for this year?

A) $7,800
B) $4,000
C) $6,800
D) $400
E) $8,800

Question 61

EGR Corporation has one asset worth $650,000.Accumulated Depreciation to date is $230,000 and accumulated CCA is $200,000.The Corporation also recorded warranty expense of $35,000.To date no customers have required warranty service,so no warranty expenditures have been made.Assuming the tax rate is constant at 40%,this will result in a:

A) A Deferred income tax asset of $2,000
B) A Deferred income tax liability of $2,000
C) A Deferred income tax asset of $26,000
D) A Deferred income tax liability of $26,000

Question 62

KER commenced operations in 2013.The company has recorded an accrual for warranty in its books during the year ended December 31,2014 amounting to $100,000.During the year 2014,customers required service from goods sold in 2013 amounting to $60,000.No similar expenditures were made during 2013.KER accrued warranty expenses totalling $100,000 for 2013 and 2014.As a result of the information above,what is the amount of deferred taxes that will appear on the 2014 statement of financial position? Assume a 20% tax rate for both years.

A) Nil.
B) A Deferred tax asset of $8,000
C) A Deferred tax liability of $8,000
D) A Deferred tax asset of $40,000

Question 63

An example of a "deductible amount" occurs when:

A) A gain on instalment sales is recognized for tax purposes as the receivable is collected, but was earlier recognized for accounting purposes when the sale was made.
B) Accelerated depreciation is used for tax purposes but straight-line depreciation is used for accounting purposes.
C) Product warranty costs recognized for tax purposes as the warranty conditions are met but recognized for accounting purposes earlier on the accrual basis.
D) Expenses are recognized more quickly for taxes than for accounting purposes.

Question 64

EGR Corporation has one asset worth $450,000.Accumulated Depreciation to date is $190,000 and accumulated CCA is $220,000.The Corporation also recorded warranty expense of $30,000.To date no customers have required warranty service,so no warranty expenditures have been made.Assuming the tax rate is constant at 40%,this will result in:

A) A net deferred income tax asset of $30,000
B) No temporary difference.
C) A net deferred income tax asset of $12,000
D) A net deferred income tax liability of $12,000

Question 65

Which of the following is an example of a temporary difference which would not result in a deferred tax asset?

A) Allowance method for doubtful accounts is used for accounting purposes while direct write-off is required for tax purposes.
B) Use of sales method of revenue recognition for accounting purposes, and instalment method of revenue recognition for tax purposes.
C) Unrealized loss on short term investment is recognized for accounting purposes during the holding period while the actual loss on date of disposal is used for tax purposes.
D) Estimated loss on disposal of a segment of a business recognized for accounting purposes but reported on the income tax return later on the basis of the actual loss.

Question 66

Which of the following is an example of a temporary difference,which would result in a deferred tax asset?

A) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
B) Rent revenue collected in advance when included in taxable income before it is included in pre-tax accounting income
C) Use of a shorter depreciation period for accounting purposes than is used for income tax purposes
D) Investment losses recognized later for accounting purposes than for tax purposes

Question 67

The following information is available for Ryan Corporation: Assets at cost-$260,000; Accumulated depreciation-$80,000; Accumulated CCA-$90,000; meals and entertainment recorded in the books-$12,000; golf dues paid-$5,000.Based on this information and a tax rate of 45%,what is the amount of the temporary difference?

A) $0
B) $1,000
C) $4,000
D) $10,000

Question 68

Which of the following could never be subject to inter-period tax allocation?

A) Proceeds from life insurance
B) Depreciation expense on operational assets
C) Estimated warranty expense
D) Rent revenue

Question 69

JMR Corporation has one asset worth $350,000.Depreciation accumulated to date is $230,000 and accumulated CCA is $200,000.Assuming the effective tax rate is constant at 40%,this will result in:

A) A Deferred income tax asset of $30,000
B) A Deferred income tax liability of $30,000
C) A Deferred income tax asset of $12,000
D) A Deferred income tax liability of $12,000

Question 70

JMR Corporation has one asset worth $350,000.Depreciation accumulated to date is $200,000 and accumulated CCA is $230,000.Assuming the tax rate is 40% what is the income tax implication?

A) A Deferred income tax asset of $30,000
B) A Deferred income tax liability of $30,000
C) A Deferred income tax asset of $12,000
D) A Deferred income tax liability of $12,000

Question 71

Which of the following does not help in explaining why (1)and (2)are different: (1)Income tax expense
(2)The product of pre-tax income and the current tax rate.

A) Permanent differences
B) Temporary differences
C) The fact that future and current tax rates are different
D) A change in the effective tax rate

Question 72

Recommended disclosures for the provision for income tax expense include all of the following except:

A) Public companies should disclose the nature of temporary differences
B) Income tax expense or benefit should be reported separately on the financial statements
C) Income tax expense should not be grouped with other expenses
D) Income taxes relating to discontinued items must be disclosed separately on the financial statements

Question 73

KER commenced operations in 2013.The company had recorded an accrual for warranty expenses in its books during the year ended December 31,2013,its first year of operations,amounting to $100,000.During the year 2014,customers required service from goods sold in 2014 amounting to $60,000.There were no similar expenditures made during 2013.KER recorded an amount for possible warranty costs for goods sold during the year in the amount of $95,000.Accounting income amounted to $80,000 and the tax rate is 40%.Assuming that KER has no other differences between accounting and tax what are the current and deferred income tax amounts that will appear on the 2014 statement of financial position?

A) Income Taxes Payable (Current): $46,000; deferred tax asset: $54,000
B) Income Taxes Payable (Current): $46,000; deferred tax liability: $54,000
C) Income Taxes Payable (Current): $22,000; deferred tax asset: $14,000
D) Income Taxes Payable (Current): $22,000; deferred tax liability: 14,000

Question 74

The term "taxable amount" includes:

A) Gains that are included in the tax return AFTER they are recognized for accounting purposes.
B) Revenues that are included in the tax return BEFORE they are recognized for accounting purposes.
C) Losses that are included in the tax return AFTER they are recognized for accounting purposes.
D) Warranty deductions for accounting purposes.

Question 75

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life,straight-line depreciation,no salvage value,purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.From the information provided above,what is the total amount of expenses that will never have an effect on taxable income (and thus never trigger any DTA/DTL amounts)?

A) $5,000
B) $6,000
C) $17,000
D) $11,000

Question 76

Which of the following is an example of a temporary difference,which could result in a deferred tax asset?

A) Gain on disposal of an asset when included in taxable income before it is included in pre-tax accounting income
B) Use of straight-line depreciation for accounting purposes and an accelerated rate for income tax purposes
C) Gross margin on instalment sales is recognized for accounting purposes before it is included in taxable income in the income tax return
D) Prepayments of expenses in year of payment; recognition of expense for accounting purposes occurs in a later year.

Question 77

A temporary difference that is deductible in future years is called:

A) A deferred tax liability
B) A deferred tax asset
C) A permanent tax asset
D) A permanent tax liability

Question 78

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life,straight-line depreciation,no salvage value,purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.Based on this information and a constant tax rate of 45%,which of the following would appear on the statement of financial position as a result of the information given above?

A) An income tax liability of $45,000.
B) A deferred tax asset of $3,510.
C) A deferred tax liability of $3,510.
D) A deferred tax asset of $18,135.
E) A deferred tax liability of $18,135.

Question 79

KER commenced operations in 2013.The company had recorded an accrual for warranty in its books during the year ended December 31,2014 amounting to $100,000.During the year 2014,customers required service from goods sold in 2013 amounting to $60,000.No similar expenditures were made during 2013.KER accrued warranty expenses totalling $100,000 for 2013 and 2014.As a result of the information above,what is the amount of deferred taxes that will appear on the 2014 statement of financial position? KER adheres to ASPE and has elected to use the Taxes Payable Method.Assume a 20% tax rate for both years.

A) Nil.
B) A Deferred tax asset of $8,000
C) A Deferred tax liability of $8,000
D) A Deferred tax asset of $40,000

Question 80

The following information is available for Ryan Corporation: Assets at cost-$260,000 (8 year life,straight-line depreciation,no salvage value,purchased 2 years ago); Accumulated depreciation-$65,000.Accumulated CCA-$105,300; CCA rate-30%; meals and entertainment recorded in the books-$12,000; golf dues paid and expensed on the books-$5,000; pre-tax accounting income-$40,000.No CCA was taken during the current year.Based on this information and a tax rate of 45%,what is taxable income?

A) $51,000
B) $41,000
C) $46,000
D) $34,000
E) $35,000