A Study on the effects of deferred income taxes on the financial ratios of manufacturing companies under the food industry belonging to the top 1000 in the Philippines for the year 2004

• Main Authors: Co, Kirk Halbert C., Dalisay, Jenny Lyn A., Dizon, Justinne D., Gonzalez, Jenna Celine L.
• Format: text
• Language: English
• Published: Animo Repository 2006
• Subjects: Deferred tax > Philippines; Tax accounting > Philippines; Corporations > Taxation > Philippines
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/14845
• Institution: De La Salle University

Companies communicate their performance for a certain period of time through financial statements. From these financial statements, financial ratios are computed. These ratios provide critical information that may be used by the decision makers, whether internal or external. Operational efficiency is usually the main concern of the users. The measurement of the bottom-line figure in the income statement or Net Income After Tax (NIAT) is what the users seek for. At face value, a company with a large amount of NIAT is perceived to be successful. On the other hand, using only NIAT in measuring the company's operational performance can result in erroneous decisions. NIAT is composed of numerous accounts, one of which is deferred income tax. Deferred income tax arises due to the difference in the recognition of income or expenses in the financial statements for tax purposes. Since deferred tax is based on estimated future expectations of the company, such account pertain only to unrealized income or expenses of the company. It can affect the perception of the decision makers whenever they base their decisions in the financial statements. This study is therefore focused on determining the effect of deferred income taxes which considers IAS/PAS 12 on the financial ratios if they can materially mislead the decision makers. Descriptive and comparative research designs were used in this study. Financial ratios with deferred tax and without deferred tax were computed to determine the relative measures of the firm's operating efficiency. A computer-aided statistical tool, the PHStat, was used in order to test the significance of the hypothesis of this study. As the result of this study, the researchers discovered that the deferred income tax has no significant effect on the different financial ratios of the food manufacturing industry in the year 2004, the year when the IAS/PAS 12 took effect. Thus, the researchers concluded that deferred income tax does not affect the decisions of the users.