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    Deferred Tax Assets

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    A company reports deferred tax assets of $200 M.

    * Describe how deferred tax assets relating to accruals arise
    * Explain how deferred tax assets relating to loss carry forwards arise
    * A company reports an increase of its deferred tax asset valuation allowance of $3 M in 2012. How does this affect income?

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    * Describe how deferred tax assets relating to accruals arise

    A deferred tax asset is an asset that the company can use in future years against a profit. This reduces the company's future taxable income, so the company pays less in income taxes. Deferred tax assets relating to accruals arise from a variety of sources. Timing differences and recording differences, as well as prepaid income taxes that may have been overpaid, can all result in a deferred tax asset. If the company uses cash basis accounting for bookkeeping purposes and accrual based accounting for income tax reporting purposes, revenue can be different if there are sales made on the last day of the fiscal year and the account is placed on an account receivable. This means the income will be higher by the amount of the sale on the income tax return, which means they're paying more in income taxes than they would if they were using the same reporting methods as what's on their books. They've basically now overpaid their taxes due to the additional income. This portion of the payment becomes a deferred tax asset on the company's books.

    * Explain how deferred tax assets relating to loss carry forwards arise

    The company can recognize part of the loss ...

    Solution Summary

    The solution describes how deferred tax assets relating to accruals arise.

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