Explanation:
A valuation allowance is established when it's more likely than not that some portion of deferred tax assets will not be realized.
Understating the valuation allowance means the company is not setting aside enough reserve for potential non-realization of deferred tax assets.
This action understates tax expenses because the valuation allowance reduces net deferred tax assets and increases tax expense.
It also overstates the value of deferred tax assets on the balance sheet because insufficient allowance is being taken.
Therefore, understating the valuation allowance leads to understated tax expenses and overstated deferred tax assets, making the company appear more profitable and having more valuable assets than reality.
Ultimate access to all questions.
A
overstates both tax expenses and the value of the deferred tax assets.
B
overstates tax expenses and understates the value of the deferred tax assets.
C
understates tax expenses and overstates the value of the deferred tax assets.
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