Question

Which of the following is NOT a way that deferred taxes affect the financial statements?

They change the calculation of cash paid for taxes in Cash Flows from Operations.

They change the calculation of total current assets on the balance sheet.

They change the calculation of retained earnings on the statement of retained earnings.

They change the calculation of income tax expense on the income statement.

Answer 1

--Correct Answer = Option #1: "They change the calculation of cash paid for taxes in Cash Flows from Operations." is NOT a way that deferred taxes affect the financial statements.

--Deferred taxes creates Deferred tax assets (or Liability) and affect Balance sheet, and also Increase or Decrease Income tax expense, thereby affecting Income Statement and Net Income.

--BUT, amount of cash paid for taxes in Cash flows from Operations is not affected by them, because Cash paid = Taxable Income x Income tax rate.