How NOLs move through the 3 statements
How does an NOL move through the 3 statements? Let's say a company has the following profits for 3 years: year 1: (100) year 2: 50 year 3: 150. Initially the company will have a loss of 100. This will then create a DTA (NOL). However, how does this move through the 3 statements?
For Cash flows, does it end up being -100 (NP) [is there also a -100 (increase in DTA)? But why would cash decrease for a DTA if it's not something you pay for?]
And then for the BS: Cash will decrease 100 for the loss (but should it for the DTA?) , so RE will decrease, but then we had 100 as an asset in DTA, which doesn't balance. Can anyone help point out where my logic is flawed? Have been searching for awhile and can't find a straightforward explanation.
good question. so on the income statement you have negative net income of $100. this flows to the first line of cash flow statement. however the increase of an asset (DTA) decreases cash flow, so your cash would be down by $200 here. ($100 from the decrease in net income and $100 from the DTA). when we arrive at your balance sheet, we have cash down by $200, but DTA up by $100, so your assets overall are down by $100. your net income is down by $100, which flows into subsequently shareholders equity. it balances
equit
Thanks so much for the reply! I'm a bit confused on why we actually are losing cash because of an increase in DTA. My understanding is the asset (DTA) doesn't cost money itself, so I assumed you wouldn't have to pay $100 in cash for it.
YIKES - the other person posting is wrong...like I would ding him out of an interview wrong.
You need to draw a distinction between NOLs and DTAs. NOLs is the running total of your losses, DTAs are the cumulative tax BENEFIT you gain from that loss. You don't just roll all NOLs into DTA, DTA is, again, the tax benefit of those losses.
The issue is also that your premise is unclear as to what is (100). If you want (100) to be Net Income, we would have to use (125) as pre-tax income (assuming 20% tax)
So - Y1, we have pretax NI of (125) and NI of (100), which creates a DTA of 25 (the taxes we will NOT have to pay in the future because of this NOL)
I/S : Pretax NI is (125), taxes are +25, Net Income = (100) CF - Net Income is (100), DTA increase of 25 is cash outflow of (25) B/S - Cash is down (125), DTA is up 25: Assets = (100) R/E = (100) -> balanced.
Here:
DTA increase of $25 would mean cash flow is increasing, nor decreasing. increase in assets increase your cash flow
You have it exactly backwards
If there is ONE thing you need to understand it is that an Asset is a USE of cash (and thus an outflow), while a liability is a SOURCE of cash (and thus an inflow).
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