indirect method confusion

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notlookinggood

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depreciation is added back to net income. ok. got it
now: are deferred tax asset/liabilities changes also added/taken out?
also: Profit from sale of equipment is also backed out? why?

And does this differ when we use the direct method?

thanks,
 
These questions are so broad you need to crack the book and re-read the stuff. You clearly don't follow the concept and trust me, you will not be able to handle the curves they will throw at you if you don't.
 
profit or loss -either is backed out from cfo since we already consider it in CFI (proceeds from sale of eqpt). the gain /loss indicates the diff between book value and actual proceeds. we dont want to double count by including it in cfo and cfi both..therefore we have to adjust.

about taxes, i shall wait for someone else to reply.
thanks
 
this actually comes from book 6, exam 2, am session. question 49. i usually nail these questions, but this one threw me for a loop. so back to the question, i didn't think it was that broad, but maybe that shows i don't grasp the material:

are tax assets/liabilities backed out? i'd appreciate more than "reread the book"
 
Here's the big picture concept. (Indirect method)

You start with the default assumption that elements in the income statement are cash, so you use net income. Next you adjust for non-cash items like depreciation.

Now if cash reciepts on sales exactly equalled accraul sales, your acounts receivable wouldn't change. But since it likely did, you have to adust for it.

ANY category on the income statement that may not have been paid/received in cash resulting in a change in assets or liabilites, has to be adjusted to a cash basis (similar to receivabels) by looking at that change.

So what's the answer for deferred taxes?

As far as direct method goes, basically you're told the cash amounts so you just use 'em. For more info here you should reread that section. Really.
 
ok, maybe i misstated the question. (i didn't) there were 2 parts to this question. the profit/loss on sale of equpiment part, which dyslexic kindly answered. and the deferred tax liablility/asset part. which we are awaiting an answer for. i didn't ask for the big picture concept of the indirect and direct method. if i did at some point, sorry didn't mean to do that and waste everyone's time, like we are doing now. so an explanation for the deferred tax asset/liabilty would be great. unbelievable.
 
taxes too will have to be adjusted then, because of the non-cash basis -as Super I points out.

thanks
 
easy there guys...
notlooking good, I don't think he's trying to be a jerk- he just wants you to think it through which will do you a world of good come test date because you will have to go through this exercise at least 5 of 6 times on FSA alone with stuff you kinda know but aren't perfectly positive right off the bat. Super said:

ANY category on the income statement that may not have been paid/received in cash resulting in a change in assets or liabilites, has to be adjusted to a cash basis (similar to receivabels) by looking at that change.
So what's the answer for deferred taxes?

He says it right there- have you changed assets or liabilities that you haven't paid/received cash for yet?
yes.
 
At the risk of creating more confusion I will attempt to answer your question: The increase in DTL is a non-cash item that will result in a future cash outflow (when the tax is actually paid). Since DTL increased, NI was less than it would have been otherwise (paid more tax), thus, add back the increase. It's non-cash and decreased NI (similar to depreciation?), add it back.

That's my interpretation, take it for what it's worth. I reserve the right to delete this post in the future.
 
agreed. i was a bit touchy, so i apologize. i've just been reviewing and reviewing and just don't like to hear, "you clearly have no idea, reread the book, buddy" when posting a question. but you are right, i was touchy. thanks for the response.
 
Think Ole Boy is right - if your pre-tax income in the income statement it greater than your taxable income because of e.g. different methods of depreciation used (DDB for tax reporting and SL for financial reporting) you end up paying less tax than you provided for in the income statement - the difference is a change in DTL and therefore non-cash and has to be adjusted for in the CFO (direct and indirect). Sample Exam 2 AM 49 said increase in deferred taxes (as explained before) - so you add back the 17



Edited 1 time(s). Last edit at Monday, May 14, 2007 at 01:44PM by Saturdaynitefeva.
 
notlooking good -

I wasn't trying to be a jerk (trust me, you'll know when I am). I have lots of years of experience teaching accounting and I can tell when someone is shaky on a concept. I'm not just thinking about the question that you asked, but other variations on that question that might appear on the exam and I want to try to help you be prepared for wahtever they might throw at you, not just a shot in the dark that they ask the same specific question.
 
it is ok to be touchy... under 20 days til test date = you are fully authorized to be touchy, moody, stressed, throw things around, scream D8mn you deferred taxes, capitalization decisions, etc!
 
This is my thinking on changes in working capital liabilities: if the liability increases, that means you should have paid cash for something, but you didn't. You held onto that cash so your CFO would be higher... seems to work for payables, DTLs, etc. Is this too simple of of thinking? Am I leaving out something important?
 
For the indirect method that is basically correct, just watch out for things like current portion of LTD and other financing current liabilities which are linked to CFF not CFO
 
hey super... can you clear things up on this thread too??? http://www.analystforum.com/phorums/read.php?11,536540,page=2
we def are going in circles...
 
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