Question

Which of the following statements best justifies analyst scrutiny of valuation allowances? Group of answer choices...

Which of the following statements best justifies analyst scrutiny of valuation allowances?

Group of answer choices

A) Changes in valuation allowances can be used to manage reported net income.

B) Large valuation allowances reflect future sources of cash for the firm.

C) Increases in valuation allowances may be a signal that management expects earnings to improve in the future.

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Homework Answers

Answer #1

Correct statement:- option A

Reason:-

A valuation allowance is a contra account (offset) against deferred tax assets that reflects the likelihood that the deferred tax assets will never be realized. Changes in the valuation allowance have a direct impact on reported income. Because management has discretion with regard to the amount and timing of a valuation allowance, changes in the valuation allowance give management significant opportunity to manage earnings.
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