If a company has $100 income tax expense and pays it entirely in cash, but then defers $10 to future periods, how do the statements change?

• A. Income Statement: No changes. Cash Flow Statement: Net Income remains the same but cash flow from operations increases by $10. Balance Sheet: Cash up by $10; Deferred Tax Liability up $10.
• B. Income Statement: Taxes increase by $10. Cash Flow Statement: Cash from Operations decreases by $10. Balance Sheet: Cash down by $10; Deferred Tax Liability down $10.
• C. Income Statement: Taxes increase by $100. Cash Flow Statement: Cash from Operations up by $10. Balance Sheet: Cash up by $10; Deferred Tax Liability up $10.
• D. Income Statement: Taxes decrease by $10. Cash Flow Statement: Cash from Operations unchanged. Balance Sheet: Cash unchanged; Deferred Tax Asset up $10.

Answer: (A)

Key idea: this question tests how timing differences in accounting for taxes show up across the statements. When tax expense is recognized but part of the tax payment is deferred to future periods, a deferred tax liability is created. The current period income statement reflects the tax expense amount, but the actual cash outflow can differ because of the deferral.

Here, the income statement shows the tax expense as 100, unchanged by the deferral—tax expense is an accrual, and the deferral only affects when cash is paid. Deferring 10 to future periods creates a Deferred Tax Liability of 10 on the balance sheet. The cash flow effect comes from the fact that not all of the current period tax is paid in cash; the actual cash paid is effectively 90, so the cash outflow for taxes is reduced by 10 relative to paying it all now. This makes cash flow from operations appear higher by 10 (the non-cash deferral adjustment reduces the current cash outflow), while net income remains the same.

On the balance sheet, cash increases by the 10 difference from not paying the full amount in the current period, and a Deferred Tax Liability of 10 is recorded to reflect the taxes owed in the future. This combination matches the described option: the income statement tax expense stays the same, the cash flow from operations increases by 10 due to the timing difference, and the balance sheet shows cash up by 10 with a Deferred Tax Liability up 10.