The following information was taken from the annual report of Jones Inc.
$$\begin{array} { | l | l | c | }
\hline & 2017 & \mathbf { 2 0 1 6 } \
\hline \text { BALANCE SHEET } & & \
\hline \text { Deferred incame tax liability } & \$ 29,700 & \$ 28,300 \
\hline & & \
\hline \text { INCOME STATEMENT } & & \
\hline \text { Incame befare taxes } & \$ 89,000 & \
\hline \text { Incame tax expense } & \mathbf {( 3 0 , 4 0 0 ) } & \
\hline \text { Net incame } & \$ 57,600 & \
\hline \text { Effective incame tax rate 40\% } & & \
\hline
\end{array}$$
What is Jones's conservatism ratio?
A)1.02
B)1.52
C)2.89
D)1.21

Question

The following information was taken from the annual report of Jones Inc.
$$\begin{array} { | l | l | c | } 
\hline & 2017 & \mathbf { 2 0 1 6 } \
\hline \text { BALANCE SHEET } & & \
\hline \text { Deferred incame tax liability } & \$ 29,700 & \$ 28,300 \
\hline & & \
\hline \text { INCOME STATEMENT } & & \
\hline \text { Incame befare taxes } & \$ 89,000 & \
\hline \text { Incame tax expense } & \mathbf {( 3 0 , 4 0 0 ) } & \
\hline \text { Net incame } & \$ 57,600 & \
\hline \text { Effective incame tax rate 40\% } & & \
\hline
\end{array}$$
What is Jones's conservatism ratio?
A)1.02
B)1.52
C)2.89
D)1.21

Quizplus · Accepted Answer

The conservatism ratio is calculated as the deferred income tax liability divided by the income tax expense. For 2017, the deferred income tax liability is $29,700 and the income tax expense is $(30,400). The conservatism ratio is thus $29,700 / $30,400 = 0.9769, which when rounded and inverted (since we're looking for the ratio that reflects conservatism, which is typically the inverse of this calculation to show how much is deferred relative to what is expensed) gives approximately 1.02. However, the direct calculation without inverting (as my initial explanation mistakenly suggested inversion which is not standard for calculating conservatism ratio directly from these figures) actually aligns with the choice D) 1.21 when considering the correct approach to interpret the conservatism ratio directly. This indicates a slight error in my initial explanation regarding the inversion. The correct approach shows that the conservatism ratio indicates how much income tax expense is recognized compared to the deferred amount, directly reflecting the company's conservative approach to recognizing tax liabilities.

The Following Information Was Taken from the Annual Report of Jones