Analyzing and Interpreting Tax Footnote
Under Armour, Inc. reports total tax expense on its income
statement for year ended December 31, 2010 of $40,442 and cash paid
for taxes of $38,773.
The tax footnote in the company's 10-K filing, reports the
following deferred tax information.
Deferred tax assets and liabilities consisted of the following (in
thousands):
December 31 ($ thousands) | 2010 | 2009 |
---|---|---|
Deferred tax assets | ||
State tax credits, net of federal tax impact | $ 1,750 | $ -- |
Tax basis inventory adjustment | 3,052 | 1,874 |
Inventory obsolescence reserves | 2,264 | 2,800 |
Allowance for doubtful accounts and other reserves | 8,996 | 7,042 |
Foreign net operating loss carryforward | 10,917 | 9,476 |
Stock-based compensation | 8,790 | 5,450 |
Intangible asset | 372 | 1,068 |
Deferred rent | 2,975 | 1,728 |
Deferred compensation | 1,449 | 1,105 |
Other | 2,709 | 3,151 |
Total deferred tax assets | 43,274 | 33,694 |
Less: valuation allowance | (1,765) | -- |
Total net deferred tax assets | 41,509 | 33,694 |
Deferred tax liabilities | ||
Prepaid expenses | (1,865) | (1,133) |
Property, plant and equipment | (3,104) | (5,783) |
Total deferred tax liabilities | (4,969) | (6,916) |
Total deferred tax assets, net | $ 36,540 | $ 26,778 |
(a) Did Under Armour's deferred tax assets increase or decrease
during the most recent fiscal year?
Under Armour's deferred tax assets Answerdecreasedincreased by
$Answer (thousands).
Which of the following best summarizes our interpretation of an
increase in a company's deferred tax assets for the most recent
year?
Deferred tax assets decreased during the year, which means that the company paid less taxes than it reported as the tax expense on its income statement.
Deferred tax assets generally arise when tax deductions are less than tax expense reported in the income statement. Because deferred tax assets increased, we can concluded that tax deductions were greater than expense.
Deferred tax assets increased during the year, which means that the company's taxable income was less than in the prior year.
Deferred tax assets increased during the year, which means that the company paid more taxes than it reported as the tax expense on its income statement.
(b) Did Under Armour's deferred tax liabilities increase or
decrease during the most recent fiscal year?
Under Armour's deferred tax liabilities Answerdecreasedincreased by
$Answer (thousands).
Which of the following statements best describes the reason for the
change in deferred tax liabilities during the most recent year?
The deferred tax liabilities increased during the recent year because they paid down their tax liability.
The deferred tax liabilities decreased during the recent year possibly because the company is now depreciating its fixed assets more for GAAP purposes than it is for tax purposes.
The deferred tax liabilities decreased during the recent year as a result of the reduction in its effective tax rate.
The deferred tax liabilities decreased during the recent year because the company's taxable income was less than in prior year.
(c) The company recorded a valuation allowance during the year.
This allowance relates to foreign net operating tax losses. Which
of the following statements appears to be false regarding the
foreign net operating tax losses and the valuation allowance.
The company's tax returns have reported losses in foreign jurisdictions. As of the end of 2010, there were insufficient profits and the tax losses could not be used in the current period.
As of December 31, 2010, the company believed some of the deferred tax assets associated with foreign tax loss carryforwards would expire unused. Therefore, a valuation allowance was recorded against the company's net deferred tax assets.
An increase to a valuation allowance will decrease current year income.
An increase to a valuation allowance will increase current year income.
What proportion of the foreign net operating losses does the
company believe will likely expire unused? (Round your answer to
the nearest whole number)
Answer%
(d) Explain how the valuation allowance affected 2010 net income.
Under Amour's valuation allowance account increased during the year, which means net income increased.
Under Amour's valuation allowance account decreased during the year, which means net income increased.
Under Amour's valuation allowance account increased during the year, which means net income decreased.
Under Amour's valuation allowance account decreased during the year, which means net income decreased.
(e) Use the financial statement effects template to record Under Armour's income tax expense for the current fiscal year along with the changes in both deferred tax assets and liabilities. Assume that income taxes payable increased by $11,431 thousand.
Use negative signs with your answers, when appropriate.
Balance Sheet |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|
Transaction | Cash Asset | + |
Noncash Assets |
= | Liabilities | + |
Contributed Capital |
+ |
Earned Capital |
|
Record tax expense, part cash and part deferred | Answer | Answer | Answer | Answer | Answer |
Income Statement |
||||
---|---|---|---|---|
Revenue | - | Expenses | = |
Net Income |
Answer | Answer | Answer |
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