Crash Course in Accounting and Financial Statement Analysis, Second Edition

Increases/Decreases in Deferred Taxes

Typically, companies are able to defer paying some portion of the income tax expense shown on their income statement. Recall our earlier discussion about deferred tax liabilities: They are created and reported on the balance sheet when an income or expense item is treated differently on GAAP financial statements than it is on the company’s (IRS) tax returns, and that difference results in a greater tax expense on the financial statements than taxes payable on the tax return.

Accordingly, these deferred taxes, which have not been paid out in cash and yet are recorded as an expense on the income statement, must be added back to net income on the cash flow statement.

Notice that Wal-Mart indicates on its income statement the portion of taxes it has deferred paying in 2004 ($177 m), and that those deferred taxes are therefore added to net income on the company’s cash flow statement (Exhibit 7.13).

Exhibit 7.13. Increases in Companies’ Deferred Taxes Must Be Added to Net Income on the cash Flow Statement

	Consolidated Statements of Income
	WAL-MART
(Amounts in millions except per share data)
Fiscal Year Ended January 31,		2006	2005	2004
Revenues:
	Net sales	$312,427	$285,222	$256,329
Other income, net	3,227	2,910	2,352
		315,654	288,132	258,681
Costs and expenses:
	Cost of sales	240,391	219,793	198,747
Operating, selling, general and administrative expenses	56,733	51,248	44,909
Operating income		18,530	17,091	15,025
Interest:
	Debt	1,171	934	729
Capital leases	249	253	267
	Interest income ...