CFA Practice Question

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CFA Practice Question

Assuming that a firm had taxable income in the previous two-year period, the tax effect of a net operating loss (NOL) usually ______

A. is reflected as a deferred tax asset/liability at the end of the NOL year.
B. results in a current receivable at the end of the NOL year.
C. is subject to a valuation allowance.
Correct Answer: B

Assuming that a firm had taxable income in the previous two-year period, the NOL can be carried back and offset against this income. This claim results in a refund and, as a result, an income tax receivable account.

User Contributed Comments 7

User Comment
stranger This is treated as an adjustment against previous taxes payable and hence results in a refund or income tax receivable.
kalps Income tax receivable amount if it can be carried back against previous two periods, however if there was no profits in previous two years then it may be a deferred tax asset whereby it cab be set off against future tax liability
freshginger What's wrong with A?
mtcfa I think the answer is correct because it says there were profits in previous years. Otherwise it could be potentially be a deferred tax asset and there fore subject to a valuation allowance. Thus, choices A and B could both be correct. The assumption of previous years taxes is the only thing that holds this question together.
thekid 'A' is wrong b/c it states "deferred tax asset/LIABILITY"....which means it would result in a deferred tax asset (which is correct) OR a deferred tax LIABILITY (which is incorrect).
sshetty2 Sounds similar to how Mr. Trump got away with avoiding to pay millions in tax dollars
Ewan2015 Uh talking of Mr Trump I believe his new Tax Cuts and Jobs Act eliminates the carryback period in almost all instances so the correct answer under new law would be A.
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