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In: Accounting
Meaning to an analyst of increases in deferred tax liabilities
Meaning to an analyst of increases in deferred tax liabilities
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Expert Solution
Firstly deferred tax liabilities in simple term can be defined as the proportion of tax which is not paid currently but will be cleared in future. Deferred tax liability is the temporary difference created due the difference in tax amount presented in two different set of accounting books maintained for financial purpose and tax purpose separately. When the book tax is greater than the actual income tax, deferred tax liability comes in to the picture. From an analyst point of view, it is very useful as it has very significant impact on the statement of cash flows. Increase in deferred tax liability is referred as the source of cash. being non-cash item, it is added to net income in the operating activities section of cash flow statement (indirect method). it is important for analyst to focus on changes in deferred tax liabilities as it will help to understand the effect of deferred tax liability on future operations. To get keep watch on changes in deferred tax liabilities, it is necessary to analyze information such as depreciation policy, amortization policy, bad-debt allowances, warranty policy, etc.
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