Net Operating Losses (NOLs) on the 3 Financial Statements
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10 سال پیش
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There’s A LOT of confusion
There’s A LOT of confusion over how Net Operating Losses (NOLs) and Deferred Tax Assets (DTAs) work on the 3 financial statements.
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
In this lesson, you’ll learn how NOLs are created and used up, how that impacts the DTA, and what the full impact on the 3 financial statements under different scenarios is.
NOLs on the 3 Statements Spreadsheet:
http://youtube-breakingintowallstreet...
NOLs and DTAs on a Real Company's Financial Statements:
http://youtube-breakingintowallstreet...
Table of Contents:
1:23 The Concept Behind Net Operating Losses (NOLs)
4:06 How NOLs Get Created and Used Up Based on Pre-Tax Income
8:52 Cash Taxes Payable and Changes to the DTA
11:33 Walkthrough of NOLs and DTAs on the 3 Financial Statements
16:44 Recap and Summary
Net Operating Losses – How They Get Created and Used Up
Idea: If a company has lost money (negative Pre-Tax Income) in prior years, it can reduce its future Taxable Income with these losses ("carry-forwards"), or even receive refunds for some of its past taxes ("carry-backs").
It's easier to explain carry-forwards, so that's what we'll focus on here (plus, it's a far more common interview question and on-the-job modeling task).
KEY CONCEPTS:
1. You do NOT adjust the Income Taxes shown on the Income Statement for anything related to NOLs – you make these adjustments separately and show the cash impact on the CFS.
2. The NOL itself does not appear on the Balance Sheet – only the tax savings it corresponds to show up there, within the Deferred Tax Asset (DTA) line item.
Example: A company has many years of prior losses accumulated in its Net Operating Loss (NOL) balance, but it suddenly turns profitable and starts recording positive Pre-Tax Income... sometimes.
Scenario 1: The company earns $100 in Pre-Tax Income, and has an initial NOL balance of $175.
In This Case: The company applies $100 of its NOL balance to offset its Pre-Tax Income and reduce its Taxable Income to $0.
It therefore pays $0 in true cash taxes. Its DTA decreases by the tax rate of 40% * $100, or $40.
On the Income Statement, nothing changes because taxes are recorded as-is. So the company’s Net Income is simply $60, or $100 of Pre-Tax Income minus $40 of Taxes.
On the Cash Flow Statement, the DTA decreasing by $40 causes cash flow to increase by $40. So at the bottom, cash is up by $100 due to $60 of Net Income and the $40 decrease in the DTA.
On the Balance Sheet, cash is up by $100, the DTA is down by $40, so the Assets side is up by $60. On the other side, Retained Earnings is up by $60 due to the Net Income of $60, so both sides balance.
Scenario 2: The company records a $200 Pre-Tax Income loss, and has an initial NOL balance of $75 from the previous step.
In This Case: The company’s NOL balance increases by $200. It pays $0 in cash taxes. Its DTA increases by $200 * 40%, or $80.
On the Income Statement, Net Income is simply negative $120 (negative $200 of Pre-Tax Income, minus negative taxes of $80).
On the Cash Flow Statement, Net Income is negative $120, and the DTA increasing by $80 reduces cash flow by $80. So cash is down by $200 at the bottom.
On the Balance Sheet, cash is down by $200, the DTA is up by $80, so the Assets side is down by $120.
On the other side, Retained Earnings is down by $120 due to the Net Income of negative $120, so both sides balance.
Scenario 3: The company earns $300 in Pre-Tax Income, and has an initial NOL balance of $275 from the previous step.
In This Case: The company applies $275 of its NOL balance to offset its Pre-Tax Income, and reduce its Taxable Income to $25.
It therefore pays $10 in true cash taxes ($25 * 40%). Its DTA decreases by 40% * $275, or $110.
On the Income Statement, nothing changes. So the company’s Net Income is simply $180, or $300 of Pre-Tax Income minus $120 of Taxes.
On the Cash Flow Statement, the DTA decreasing by $110 causes cash flow to increase by $110. So at the bottom, cash is up by $290 due to $180 of Net Income and the $110 decrease in the DTA.
On the Balance Sheet, cash is up by $290, the DTA is down by $110, so the Assets side is up by $180. On the other side, Retained Earnings is up by $180 due to the Net Income of $180, so both sides balance.
By http://breakingintowallstreet.com/ "Financial Modeling Training And Career Resources For Aspiring Investment Bankers"
In this lesson, you’ll learn how NOLs are created and used up, how that impacts the DTA, and what the full impact on the 3 financial statements under different scenarios is.
NOLs on the 3 Statements Spreadsheet:
http://youtube-breakingintowallstreet...
NOLs and DTAs on a Real Company's Financial Statements:
http://youtube-breakingintowallstreet...
Table of Contents:
1:23 The Concept Behind Net Operating Losses (NOLs)
4:06 How NOLs Get Created and Used Up Based on Pre-Tax Income
8:52 Cash Taxes Payable and Changes to the DTA
11:33 Walkthrough of NOLs and DTAs on the 3 Financial Statements
16:44 Recap and Summary
Net Operating Losses – How They Get Created and Used Up
Idea: If a company has lost money (negative Pre-Tax Income) in prior years, it can reduce its future Taxable Income with these losses ("carry-forwards"), or even receive refunds for some of its past taxes ("carry-backs").
It's easier to explain carry-forwards, so that's what we'll focus on here (plus, it's a far more common interview question and on-the-job modeling task).
KEY CONCEPTS:
1. You do NOT adjust the Income Taxes shown on the Income Statement for anything related to NOLs – you make these adjustments separately and show the cash impact on the CFS.
2. The NOL itself does not appear on the Balance Sheet – only the tax savings it corresponds to show up there, within the Deferred Tax Asset (DTA) line item.
Example: A company has many years of prior losses accumulated in its Net Operating Loss (NOL) balance, but it suddenly turns profitable and starts recording positive Pre-Tax Income... sometimes.
Scenario 1: The company earns $100 in Pre-Tax Income, and has an initial NOL balance of $175.
In This Case: The company applies $100 of its NOL balance to offset its Pre-Tax Income and reduce its Taxable Income to $0.
It therefore pays $0 in true cash taxes. Its DTA decreases by the tax rate of 40% * $100, or $40.
On the Income Statement, nothing changes because taxes are recorded as-is. So the company’s Net Income is simply $60, or $100 of Pre-Tax Income minus $40 of Taxes.
On the Cash Flow Statement, the DTA decreasing by $40 causes cash flow to increase by $40. So at the bottom, cash is up by $100 due to $60 of Net Income and the $40 decrease in the DTA.
On the Balance Sheet, cash is up by $100, the DTA is down by $40, so the Assets side is up by $60. On the other side, Retained Earnings is up by $60 due to the Net Income of $60, so both sides balance.
Scenario 2: The company records a $200 Pre-Tax Income loss, and has an initial NOL balance of $75 from the previous step.
In This Case: The company’s NOL balance increases by $200. It pays $0 in cash taxes. Its DTA increases by $200 * 40%, or $80.
On the Income Statement, Net Income is simply negative $120 (negative $200 of Pre-Tax Income, minus negative taxes of $80).
On the Cash Flow Statement, Net Income is negative $120, and the DTA increasing by $80 reduces cash flow by $80. So cash is down by $200 at the bottom.
On the Balance Sheet, cash is down by $200, the DTA is up by $80, so the Assets side is down by $120.
On the other side, Retained Earnings is down by $120 due to the Net Income of negative $120, so both sides balance.
Scenario 3: The company earns $300 in Pre-Tax Income, and has an initial NOL balance of $275 from the previous step.
In This Case: The company applies $275 of its NOL balance to offset its Pre-Tax Income, and reduce its Taxable Income to $25.
It therefore pays $10 in true cash taxes ($25 * 40%). Its DTA decreases by 40% * $275, or $110.
On the Income Statement, nothing changes. So the company’s Net Income is simply $180, or $300 of Pre-Tax Income minus $120 of Taxes.
On the Cash Flow Statement, the DTA decreasing by $110 causes cash flow to increase by $110. So at the bottom, cash is up by $290 due to $180 of Net Income and the $110 decrease in the DTA.
On the Balance Sheet, cash is up by $290, the DTA is down by $110, so the Assets side is up by $180. On the other side, Retained Earnings is up by $180 due to the Net Income of $180, so both sides balance.
10 سال پیش
در تاریخ 1393/08/13 منتشر شده
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