Which statement is true about deferred tax assets and liabilities?

Which statement is true about deferred tax assets and liabilities?

• A. A deferred tax liability represents a financial benefit
• B. A deferred tax asset represents a financial benefit
• C. A deferred tax asset is a liability
• D. A deferred tax asset has no impact on cash flow

Answer: (B)

Deferred tax assets and liabilities come from timing differences between how transactions are recognized for accounting purposes and for tax purposes. A deferred tax asset arises when deductible temporary differences, tax losses, or credits will reduce future taxes payable. Because it will lower taxes in future periods, it represents a financial benefit and is carried as an asset on the balance sheet. This is why the statement about a deferred tax asset representing a financial benefit is the correct one. In contrast, a deferred tax liability is the opposite: it reflects taxes that will be due in the future because taxable temporary differences will increase future tax payments. It is not a benefit, but a future obligation. A deferred tax asset is not a liability, by definition, so that option is incorrect. Regarding cash flow, a deferred tax asset does relate to future cash savings (it reduces future tax outlays), even though it may not affect cash in the current period. Saying it has no impact on cash flow ignores the fact that it represents a future cash benefit. So the correct statement captures that a deferred tax asset represents a financial benefit.

Deferred tax assets and liabilities come from timing differences between how transactions are recognized for accounting purposes and for tax purposes. A deferred tax asset arises when deductible temporary differences, tax losses, or credits will reduce future taxes payable. Because it will lower taxes in future periods, it represents a financial benefit and is carried as an asset on the balance sheet. This is why the statement about a deferred tax asset representing a financial benefit is the correct one.

In contrast, a deferred tax liability is the opposite: it reflects taxes that will be due in the future because taxable temporary differences will increase future tax payments. It is not a benefit, but a future obligation.

A deferred tax asset is not a liability, by definition, so that option is incorrect.

Regarding cash flow, a deferred tax asset does relate to future cash savings (it reduces future tax outlays), even though it may not affect cash in the current period. Saying it has no impact on cash flow ignores the fact that it represents a future cash benefit.

So the correct statement captures that a deferred tax asset represents a financial benefit.