A company has $100 of NOLs on its balance sheet (as a DTA). This year it earns $200 of pretax income and uses the full NOL. Walk through the three statements (40% tax rate).

Question

IBPrep · Accepted Answer

IS: apply the $100 NOL against $200 PTI, so taxable income = $100 and cash taxes = $40. Book PTI is still $200 with a full $80 book tax expense, so NI = $120. Of that book tax, $40 is cash and $40 is non-cash deferred tax (burning the DTA). CFS: NI +$120, add back $40 of deferred tax. Cash +$160. BS: Cash +$160, DTA -$40; Retained earnings +$120. Balances.

A company has $100 of NOLs on its balance sheet (as a DTA). This year it earns $200 of pretax income and uses the full NOL. Walk through the three statements (40% tax rate).

Answer

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