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Author: ibarz Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Financial Statements Question. Date: 11/22/2005 7:09 PM
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Hi,

When looking at a company's free cash flow spreadsheet sample below,

Net Income/Starting Line 495.9 280.3 110.2 409.1 228.5
Depreciation/Depletion 14.4 9.0 4.3 15.0 11.2
Deferred Taxes 27.5 13.0 15.4 32.4 12.1
Non-Cash Items (2.6) (0.9) 1.4 (0.2) (3.2)
Changes in Work Cap (485.1) (230.6)(175.7) (344.7) (553.7)
Cash from Operating 50.1 70.8 (44.5) 111.6 (305.0)

What is the Deferred Taxes row? How is this number determined?

Thanks,

Ibarz
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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14284 of 35357
Subject: Re: Financial Statements Question. Date: 11/22/2005 7:53 PM
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Hi,

I think you're not at the right board.

We don't do much company analysis here.

Try this one:
http://boards.fool.com/Messages.asp?bid=100104

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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14286 of 35357
Subject: Re: Financial Statements Question. Date: 11/23/2005 12:42 AM
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I'm no expert, but from my big 3 hr accounting course years ago, let me take a stab at it.

Whereas most individuals use cash accounting, businesses usually use accrual accounting. That means that some expenses paid in other periods (and sometimes even prepaid) are prepaid and carried on the books as assets. The idea is to count business expenses especially related to cost of doing business in the accounting period in which they are used rather than when they are paid. Hence, this period's earnings reflect the cost of producing the product sold this period.

Deferrals are possible under a variety of circumstances. They have the effect of shifting costs or earnings from one period to another. They are used by companies to smoothe out peaks and valleys in earnings. And sometimes to cover short term cash shortages.

Depending on the nature of the business involved, these entries can be typical of that kind of business. But they might also raise a few eyebrows. You would rather have solid growth in earnings without such entries.

To answer your question, How was this number determined. It was deliberately selected by the company accountants within the legal limits to dress up the company numbers for the report you are looking at. They are window dressing.

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Author: brewer12345 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 14288 of 35357
Subject: Re: Financial Statements Question. Date: 11/23/2005 8:01 AM
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Ibarz:

Most companies keep two sets of books: GAAP accounting-based and tax accounting-based. GAAP accounting is done according to "generally accepted accounting principles" and is what is audited and reported in SEC filings. It is based on accruals to determine profits, etc. In contrast, tax accounting is done for the purposes of determining what a company owes in taxes. Tax accounting is based on IRS (or othe tax authority) rules and tends to be cash-based rather than accrual-based.

The company you are looking at has a timing difference between when income is recognized for tax purposes and when income is recognized under GAAP. positive umber in the deferred taxes lie item in the cash flow statement indicates that the company is recognizing income in the current period under GAAP that they have not recognized yet for tax purposes. In theory, they will eventually have to pay cash taxes on this income, so they put up an accrual for it. In actual practice, it may be a loooong time (or never) before they actually pay the cash out.

If I have succeeded in confusing you, ask away and I will try to clarify.

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