MCQ Quiz

Question 1 of 21

A company pays a regulatory fine that is recognized as an expense for financial reporting purposes but is not deductible under tax law. This item will most likely result in:

A deferred tax asset
A deferred tax liability
No deferred tax asset or liability

Question 2 of 21

A deferred tax liability is unlikely to reverse because the company continually acquires new fixed assets, making the deferred portion grow indefinitely. An analyst should most likely treat this deferred tax liability as:

A liability
Equity
Neither a liability nor equity

Question 3 of 21

A government grants a company a direct tax credit for purchasing solar panels. This credit will most likely be recorded as:

A deferred tax asset
A deferred tax liability
No deferred tax asset or liability

Question 4 of 21

A company has pre-tax income of EUR 500,000 and pays EUR 85,000 in cash taxes during the year. Its cash tax rate is closest to:

15%
17%
20%

Question 5 of 21

An asset has a carrying amount of USD 40,000 and a tax base of USD 60,000. This temporary difference will most likely result in a:

Deferred tax asset
Deferred tax liability
No deferred tax item

Question 6 of 21

A deferred tax liability is expected to reverse in the near future, requiring a cash tax payment. For financial analysis purposes, an analyst should most likely treat it as:

Equity
A liability
Neither a liability nor equity

Question 7 of 21

Under US GAAP, if it is doubtful that a company will earn sufficient future profits to utilize a deferred tax asset, the company should most likely establish a:

Valuation allowance to reduce the deferred tax asset
Deferred tax liability to offset the deferred tax asset
Permanent write-off of the full deferred tax asset

Question 8 of 21

Accounting profit, as reported on the income statement, is most accurately described as income:

Computed under the prevailing tax laws of the relevant jurisdiction
Before taxes, determined in accordance with prevailing accounting standards
After deducting the income tax payable for the period

Question 9 of 21

An analyst wants to forecast a company's future earnings on the income statement. Which tax rate is most relevant for this purpose?

Cash tax rate
Effective tax rate
Statutory tax rate

Question 10 of 21

The tax base of an asset is best described as the amount at which the asset is valued for:

Financial reporting purposes under accounting standards
Tax purposes under the relevant tax laws
Market purposes based on fair value

Question 11 of 21

When both the timing and the amount of future tax payments related to a deferred tax liability are uncertain, analysts should most likely treat the deferred tax liability as:

A liability
Equity
Neither a liability nor equity

Question 12 of 21

A company reports pre-tax income of USD 200,000 and an income tax expense of USD 30,000. Its effective tax rate is closest to:

10%
15%
20%

Question 13 of 21

A company earns equal pre-tax profits of USD 100 in Country A (40% tax rate) and Country B (10% tax rate). Its combined effective tax rate is closest to:

10%
25%
40%

Question 14 of 21

A company's effective tax rate is persistently lower than its statutory tax rate. The most likely explanation for this disclosed in the notes to financial statements is:

The company operates entirely in its home country
The company generates significant income in lower-tax jurisdictions
The company has no permanent differences

Question 15 of 21

Under IFRS, if sufficient doubt arises about a company's ability to realize an existing deferred tax asset, the company should most likely:

Create a valuation allowance equal to the unrecoverable portion
Reverse the existing deferred tax asset
Reclassify the deferred tax asset as a deferred tax liability

Question 16 of 21

A company uses straight-line depreciation for financial reporting and accelerated depreciation for tax purposes. In the early years of an asset's life, this practice most likely creates a:

Deferred tax asset, because the tax base exceeds the carrying amount
Deferred tax liability, because the carrying amount exceeds the tax base
Permanent difference, because the total depreciation amounts differ over the asset's life

Question 17 of 21

The statutory tax rate is best described as the:

Reported income tax expense divided by pre-tax income
Cash taxes paid divided by pre-tax income
Corporate income tax rate in the country where the company is domiciled

Question 18 of 21

A liability has a carrying amount of EUR 200,000 and a tax base of EUR 150,000. This temporary difference will most likely result in a:

Deferred tax asset
Deferred tax liability
Permanent difference

Question 19 of 21

An asset has a carrying amount of EUR 120,000 and a tax base of EUR 90,000. This temporary difference will most likely result in a:

Deferred tax asset
Deferred tax liability
Permanent difference

Question 20 of 21

A company has income tax payable of USD 80,000 and its deferred tax liability increased by USD 10,000 during the year. The income tax expense on the income statement is:

USD 70,000
USD 80,000
USD 90,000

Question 21 of 21

A company owes EUR 50,000 to the tax authority for income earned during the current year, payable next quarter. On this year's balance sheet, this amount is most likely recorded as:

Income tax expense
Taxes payable
Deferred tax liability

Analysis of Income Taxes (Katas)

First Principles Thinking: permanent differences create no deferred tax

First Principles Thinking: no expected reversal → no future cash outflow → treat as equity

First Principles Thinking: tax credits are permanent differences

First Principles Thinking: cash tax rate = cash taxes paid ÷ pre-tax income

First Principles Thinking: tax base exceeds carrying amount → deferred tax asset

First Principles Thinking: expected reversal → treat deferred tax liability as debt

First Principles Thinking: valuation allowance reduces DTA to realizable amount (US GAAP)

First Principles Thinking: definition of accounting profit

First Principles Thinking: effective tax rate for earnings, cash tax rate for cash flows

First Principles Thinking: definition of tax base

First Principles Thinking: dual uncertainty → exclude from both debt and equity

First Principles Thinking: effective tax rate = income tax expense ÷ pre-tax income

First Principles Thinking: effective tax rate = total taxes ÷ total pre-tax income

First Principles Thinking: effective rate below statutory rate → lower-tax foreign income

First Principles Thinking: IFRS reversal vs. US GAAP valuation allowance

First Principles Thinking: accelerated tax depreciation → lower tax base → deferred tax liability

First Principles Thinking: definition of statutory tax rate

First Principles Thinking: liability carrying amount exceeds tax base → deferred tax asset

First Principles Thinking: carrying amount exceeds tax base → deferred tax liability

First Principles Thinking: income tax expense = taxes payable + change in deferred tax liabilities

First Principles Thinking: taxes payable as a current liability