Problem 2: (10 points)

The financial statement of Wal-Mart Stores, Inc. revealed the following information regarding the firms income taxes:

Note 9. Taxes

Income from Continuing Operations

The components of income from continuing operations before income taxes are as follows:

	Fiscal Years Ended January 31,
(Amounts in millions)	2014				2013				2012
U.S.	$	19,412			$	19,352			$	18,685
Non-U.S.	5,244				6,310				5,647
Total income from continuing operations before income taxes	$	24,656			$	25,662			$	24,332

A summary of the provision for income taxes is as follows:

	Fiscal Years Ended January 31,
(Amounts in millions)	2014				2013				2012
Current:
U.S. federal	$	6,377			$	5,611			$	4,596
U.S. state and local	719				622				743
International	1,523				1,743				1,383
Total current tax provision	8,619				7,976				6,722
Deferred:
U.S. federal	(72		)		38				1,444
U.S. state and local	37				(8		)		57
International	(479		)		(48		)		(299		)
Total deferred tax expense (benefit)	(514		)		(18		)		1,202
Total provision for income taxes	$	8,105			$	7,958			$	7,924

Deferred Taxes

The significant components of the Company's deferred tax account balances are as follows:

		January 31,
(Amounts in millions)		2014				2013
Deferred tax assets:
Loss and tax credit carryforwards		$	3,566			$	3,525
Accrued liabilities		2,986				2,683
Share-based compensation		126				204
Other		1,573				1,500
Total deferred tax assets		8,251				7,912
Valuation allowances		(1,801		)		(2,225		)
Deferred tax assets, net of valuation allowance		6,450				5,687
Deferred tax liabilities:
Property and equipment		6,295				5,830
Inventories		1,641				1,912
Other		1,827				1,157
Total deferred tax liabilities		9,763				8,899
Net deferred tax liabilities		$	3,313			$	3,212

Required:

a. Assuming that Wal-Mart had no significant permanent differences between book income and taxable income, did income before taxes for financial reporting exceed or fall short of taxable income for year ended 2012, 2013 and 2014? Explain.

b. Will the adjustment to net income for deferred taxes to compute cash flow from operations in the statement of cash flows result in an addition or a subtraction for 2012, 2013 and 2014?

c. The company's accrued liabilities include accrued wages, self-insurance, accrued taxes, accrued utilities, and accrued interest etc. The company recognizes an expense and a liability for financial reporting for the accrued liabilities. However, they are expenses not yet deducted for tax purposes. Why are deferred taxes related to accrued liabilities disclosed as a deferred tax asset instead of a deferred tax liability?

d. For financial purposes, a company recognizes share-based compensation expenses during vesting period (from the grant date to the vesting date) based on the grant date fair value of the award. Under current tax law, the company receives a compensation expense deduction related to share-based compensation only when those options are exercised. Why are deferred taxes related to share-based compensation disclosed as a deferred tax asset?

e. Like most companies, Wal-Mart uses the straight-line depreciation method for financial reporting and accelerated depreciation methods for income tax purposes. Why are deferred taxes related to depreciation disclosed as a deferred tax liability?