CFA Practice Question

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CFA Practice Question

A firm's deferred tax liability account balance would continue to increase from year to year if its book income consistently exceeds taxable income (due to temporary rather than permanent differences) and the difference continues to widen. True or False?
Correct Answer: True

An increasing deferred tax liability results from book income exceeding taxable income due to temporary differences. Financial statement users may want to examine information closely for possible earnings manipulation.

User Contributed Comments 3

User Comment
kalps If book income continuously keeps exceeding taxable income (due to timing differences) then there will be a deferred income tax liability that will continue to grow.
Renaud1807 what about "continue to widen"?
johntan1979 I thought that eventually, it will reach a point where the DTLs will never be reversed and should be charged directly to equity instead of liability?

But I guess that in the situation of the question above, the growth was just starting, hence the statement is true, that DTL will continue to grow.
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