DTA on 3 statements

Based on the most helpful WSO content, here's a detailed breakdown of how Deferred Tax Assets (DTAs) impact the three financial statements:

Year 1: Negative Pre-Tax Income

Income Statement (IS): - Pre-tax income: $(100) - Income tax: +$25 (assuming a tax rate of 25%) - Net Income: $(75)

Cash Flow Statement (CS): - Net Income: $(75) - DTA: +$25 (since the DTA is created due to the loss) - Net Cash: $(100)

Balance Sheet (BS): - Shareholders' equity: $(75) (reflecting the net income loss) - Cash: $(100) (reflecting the net cash outflow) - DTA: +$25 (reflecting the deferred tax asset created)

Year 2: Positive Pre-Tax Income

Income Statement (IS): - Pre-tax income: $100 - Income tax: $(25) (assuming the DTA is utilized) - Net Income: $75

Cash Flow Statement (CS): - Net Income: $75 - DTA: $(25) (since the DTA is utilized) - Net Cash: $100

Balance Sheet (BS): - Shareholders' equity: $75 (reflecting the net income gain) - Cash: $100 (reflecting the net cash inflow) - DTA: $(25) (reflecting the utilization of the deferred tax asset)

Summary

• Year 1: The creation of a DTA due to a pre-tax loss increases the DTA on the balance sheet and offsets the income tax expense, resulting in a net income loss and a decrease in cash.
• Year 2: The utilization of the DTA due to positive pre-tax income decreases the DTA on the balance sheet, reduces the income tax expense, resulting in net income gain and an increase in cash.

This should help you understand how DTAs flow through the three financial statements. If you need more detailed examples or have specific scenarios, feel free to ask!

Sources: 21 Finance Interview Questions and Answers, 21 Finance Interview Questions and Answers, Question on NOLs, Net debt: The definite list, TRICKY Enterprise Value Technical Question