a. Assuming that Starbucks had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for 2012? Explain. Taxable income before income tax is $2,059 million, and taxable income should minus $674.4 million. So income before taxes exceeds taxable income. b. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or subtraction for 2012? There will be a subtraction from net income for deferred taxes to compute cash flow. c. Starbucks rents retail space for its coffee shops. It must recognize rent expense as it uses rental facilities but cannot claim an income tax deduction until it pays cash to the landlord. Suggest the scenario that would give rise to a deferred tax asset instead of a deferred tax liability related to occupancy cost – Accrued Occupancy Cost. No lease payment in the beginning of the rent. As a result, the company recognizes rent expense earlier for financial reporting than for income tax reporting in order for Starbucks to report deferred tax assets.
d. Starbucks recognizes an expense related to retirement benefits as employees rendered services but cannot claim an income tax deduction until it pays cash to a retirement fund. Why do the deferred taxes for deferred compensation appear as a deferred tax asset – Accrued Compensation and Related Costs? Suggest possible reasons why the deferred tax asset decreased slightly between the end of 2011 and the end of 2012. Company can contribute cash to a retirement fund in later years, it can claim an income tax deduction. The decreasing amount of the deferred tax asset in could be. Starbucks reports deferred revenue for sales of stored value cards, such as the Starbucks Card and gift certificates.
These amounts are taxed when collected, but not recognized in financial reporting income until tendered at a store. Why does the tax effect of deferred revenue appear as a deferred tax asset? Why might the value of this deferred tax asset doubled from 2011 to 2012? Because they recognize revenue even they didn’t get the cash. So the tax can be deferred until they get the cash. g. Starbucks recognizes a valuation allowance on its deferred tax assets to reflect “net operating losses of consolidated foreign subsidiaries.” Presumably, these are included in “Other” deferred tax assets. Why might the valuation allowance have financial increase between 2011 and 2012?(no idea)
h. Starbucks uses the straight-line depreciation method for financial reporting and accelerated depreciation for income tax reporting. Like most firms, the largest deferred tax liability is for property plant and equipment (depreciation). Explain how depreciation leads to a deferred tax liability. Suggest possible reasons why the amount of the deferred tax liability related to depreciation increased between 2011 and 2012. Starbucks uses different depreciation method for financial reporting and income tax reporting. So the taxable income on financial statements may lower than on income tax reporting. The difference between is deferred tax liability. The accelerate depreciation calculate more with the time, so the amount may increased during 2011 to 2012.