CFA Practice Question

CFA Practice Question

Which is not an example of a temporary difference on income tax expense?
A. Restructuring costs
B. Prepaid revenue
C. Using the straight-line method for tax purposes and FIFO method for reporting purposes
Explanation: Temporary differences are usually the result of the use of different accounting policies or estimates for tax purposes than for financial reporting differences. Posting prepaid revenue would employ the same accounting policy for both purposes.

User Contributed Comments 13

User Comment
humphrey I believe A is a basis for permanent difference, 'cause restructuring costs are not tax deductible.
pigcat Tax law counts income on cash basis, whereas GAAP counts incoem on accrued basis. Therefore, prepaid revenue will be taxed when cash is received, while unearned revenue will be recorded as liability. There is, of course, a temporary differnce on income tax expense. For answer C, I don't see any connections between straight-line and FIFO. If both are allowed for tax purpose, why would there be a difference on income tax expense. I still think "C" is correct.
kevin What? Tax law counts income on cash basis?

Pigcat: if a company pays for a building with cash, all of the costs will be expensed for tax purpuses?
KD101 "A" is one of the correct answer - I am not sure about others - A bank called Wachovia (Old First Union) closed some businesses (Money store) in 1999 or 2000 and I remember that for tax purpose 4th qtr of 2002 when they said that the effective tax rate was lower bacause of money stores
Jimmie C is unclear because what does depreciation have to do with inventory. Inventory reporting is a permenant difference, until a change in accounting principle takes place and depriciation , @ S/L, creates a permenant difference since there is no reversal in later years of the asset's life.
Ebenezer I think the question is being asked on the basis all the items appear on the income statement as an income/expense, in which case prepaid revenue would be the only one which is not a timing difference since it is recognised as income in both financial reporting and tax purposes. The others are temporary timing differences.
StanleyMo if you pay attention, usually company with restructuring have alot of DFA.
(i think because they still pay tax to government until the business/assets is sold)
eboyd Very tricky. According to the notes, both prepaid expenses and unearned revenues give rise to temporary differences. However, it doesn't say anything about prepaid revenues. Is there even such a thing as prepaid revenue?
Domanov Must be a kind of advances given\received, I guess.
CFunder See pg. 507 of the CFAI textbook question 11, "A company receives advanced payments from customers that are immediately taxable but will not be recognized for accounting purposes until the company fulfills its obligation: Answer is B) DFA
Kashi2010 I understand why B is right - but why is C a 'temporary difference??

C just makes no sense - straight line = depreciation, FIFO = inventory. They are completely unrelated so wouldnt create any difference (perm or temp) surely??
mrpman All i know is if a company uses accelerated depr for tax purposes and ssl for financial reporting, this will result in DTL because taxable income is less than pre tax income
pigletin prepaid revenue is earned, that's why
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