DTA / DTL? When do they come into play?
Lets say I have $20 in inventory. $5 in revenue is generated with corresponding $10 in COGS. The accounting flow in my mind is $3 decrease in NI on I/S (assuming 40% tax rate). On the B/S, inventory falls by $5 and retained earnings in Equity decreases by $3. Net cash for this period is up $2 (NI down $3, $5 increase in cash from decrease in inventory) and the B/S balances. Is this correct?
What happens then if instead of removing inventory due to revenue being recognized, it is written down by $5 instead? Wouldn't the same logic still follow? Other operating expenses up $5 causes NI to fall by $3 (assuming 40% tax rate). On the B/S, inventory also falls by $5 and retained earnings falls by $3. Net cash for the period is up $2 (NI down $3, $5 increase in cash from the decrease in inventory) and the B/S balances. However, I see that some answers include another asset in the form of a DTA of $2 instead of any changes to cash which makes me confused. What exactly is a Deferred tax asset or liability? If you include the DTA of $2, wouldn't the B/S no longer balance since your cash is up $2 from the fall in NI and corresponding increase due to writing down inventory?
DTA and DTL are only for temporary differences. An impairment is permanent.
DTA and DTL are caused by temporary difference. It s due to difference between cash and accrual basis.
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