prepping for my CFA lv 1 exam now and have a question regarding the valuation allowance..
"Would an increase in valuation allowance signal the company's expectations of a decreased future earnings power or increased future earnings power?" -- please help explain as well... :)
Thanks!
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I would assume that an increase in valuation allowance would mean that the company is developing a reserve that it can reverse in later years to reduce taxes and thereby signals that the company's future earnings power is likely to decrease
An allowance account is a contra-account to an asset which reduces that asset. So therefore an increase in the allowance reflects a decreased expectation in the company's future earnings power. Similar to if "allowance for doubtful accounts" was increased, meaning that the company expects it will be able to collect less (decrease) from its outstanding receivables.
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