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View Help it's safer to stay in Protected View. Enable Editing M4 Group Case - Income Taxes SC-2 Analyzing Disney's income tax disclosures The following questions pertain to Disney's 2012 financial statements and income tax footnote shown below. DISNEY'S 2012 FINANCIAL STATEMENTS Consolidated Statements of income (in millions, except per share data) 2012 2011 2010 Revenues $ 42,278 $ 40,893 $ 38,063 Costs and expenses (33,415) (33,112) (31,337) Restructuring and impairment charges (55) (270) Other income expense), net 239 75 140 Net interest expense (369) (343) (409) Equity in the income of investees 627 585 440 Income before income taxes 9.260 8,043 6,627 Income taxes (3.087) (2.785) (2,314) Net income 6.173 5.258 4313 Less: Net income attributable to noncontrolling interests (491) (451) (350) Net income attributable to Disney $ 5,682 $ 4,807 $ 3,963 Earnings per share attributable to Disney Diluted $ 3.13 $ 2.52 $ 203 Basic $ 3.17 $ 256 $ 207 Weighted average number of common and common equivalent shares outstanding Diluted 1,818 1,909 1.948 Basic 1.794 1,878 1,915 (100) a otected View - Saved to this PC- Search View Help safer to stay in Protected View. Enable Editing Consolidated Balance Shoots (in millions, except per share data) September 29 2012 October 1, 2011 ASSETS Current assets Cash and cash oquivalents Receivables Inventorios Television costs Deferred income taxes Other current assets Total current assets Film and to lovision costs Investments Parks, resorts and other property, at cost attractions, buildings and equipment Accumulated depreciation 3,387 6.540 1.537 676 765 804 13,709 4,541 2.723 3,185 6,182 1,595 674 1,487 634 13,757 4,357 2,435 Projects in progress Land 38.582 (20.687 17,895 2,453 1,164 21,512 5,015 25.110 2.289 $ 74,898 35,515 (19,572) 15.943 2,625 1,127 19.695 5,121 24,145 2,614 72,124 $ Intangible assets, net Goodwill Other assets Total assets LIABILITIES AND EQUITY Current liabilities Accounts payable and other accrued liabilities Current portion of borrowings Unoamed royalties and other advancos Total current liabiltos Borrowings Dolored income taxes Other long-term liabilities Commitments and contingencies (Note 14) Equity Proferred stock. $0.01 par value Authorized 100 million shares, issued none Common stock, 30.01 par value Authorized 4.6 billion sharos, issued 2.8 bilion shares at September 29, 2012 and 2.7 billion shares al October 1, 2011 Retained earnings Accumulated other comprehensive loss $ 6,393 3,614 2,806 12.813 10,697 2.251 7,179 6,362 3,055 2.671 12.088 10,922 2,866 6,795 31,731 42,965 (3,266) 30.296 38,375 (2.630) Cected View - Saved to this PC- Search View Help afer to stay in Protected View. Enable Editing 188 Consolidated Statements of Cash Flows (in millions) 2012 2011 2010 OPERATING ACTIVITIES Net income $ 6.173 $ 5,258 $ 4,313 Depreciation and amortization 1.987 1.841 1.713 Gains on acquisitions and dispositions (184) (75) (118) Deferred income taxes 472 127 133 Equity in the income of investees (827) (585) (440) Cash distributions received from equity investees 683 808 473 Net change in film and television costs (52) 332 238 Equity-based compensation 408 423 391 Impairment charges 22 16 132 Other 195 Changes in operating assets and liabilities Receivables (108) (518) (688) Inventories 18 (199) (127) Other assets (151) (189) 42 Accounts payable and other accrued liabilities (608) (367) 649 Income taxes (242) 134 (144) Cash provided by operations 7.980 6.994 6.578 INVESTING ACTIVITIES Investments in parks, resorts and other property (3.784) (3.559) (2,110) Proceeds from dispositions 15 504 170 Acquisitions (1.088) (184) (2.493) Other 98 (107) (90) Cash used in investing activities (4.769) (3.288) FINANCING ACTIVITIES Commercial paper borrowings, net 467 393 1,190 Borrowings 3,779 2.350 Reduction of borrowings (3.822) (1.098) (1.371) Dividends (1.076 ) (750) (653) Repurchases of common stock (3.015) (4.993) (2.089) Proceeds from exercise of stock options 1.008 1.128 1.133 Other (326) (259) (293) Cash used in financing activities (2.985) 3.233) Impact of exchange rates on cash and cash equivalents (20) (12) (87) Increase/(decrease) in cash and cash equivalents 202 463 (695) Cash and cash equivalents, beginning of year 3.185 2.722 Cash and cash equivalents, end of year $ 3,387 $ 3,185 $ 2.722 Supplemental disclosure of cash flow information: Interest paid $ 718 $ 377 $ 393 Income taxes paid $ 2.030 $ 2.341 $ 2.170 View Help safer to stay in Protected View Enable Editing DISNEY'S 2012 INCOME TAXES FOOTNOTE EXCERPTS Income Taxes 2012 2011 2010 Income Before Income Taxes Domestic (including U.S. exports) Foreign subsidiaries $6,074 $ 8,105 1.155 $ 9.260 $7.330 713 $ 8.043 553 $ 6,627 Income Tax Expense (Benefit) Current Federal State Foreign Deferred Federal State $ 1.975 227 422 $ 1.851 272 521 $ 1.530 230 432 2,198 405 (2) 147 (0) 141 $ 2,785 307 (191) 116 $ 2.314 $ 3.087 September 29. 2012 October 1. 2011 $ (3.034) (579) (100) (584) (301) $(2.800) (500) (323) (554) (380) Components of Deferred Tax Assets and Liabilities Deferred tax assets Accrued liabilities Foreign subsidiaries Equity-based compensation Noncontrolling interest net operating losses Other Total deferred tax assets Deferred tax abilities Depreciable, amortable and other property Licensing revenues Leveraged leases Other Total deferred tax liabilities Net deferred tax liability before valuation allowance Valuation allowance Net deferred tax ability 4.924 330 33 100 3.393 670 811 1.480 4,959 301 38 130 6,434 799 580 $ $1,379 The valuation allowance principally relates to tax attributes of $193 million acquired with UTV and a 5584 million deferred tax asset for the noncontrolling interest share of net operating losses at the International Theme Parks. The ultimate recognition of the noncontrolling interest share of the net operating losses, which have an indefinite carryforward period, would not have an impact on net income attributable to Disney as any income tax beneft would be offset by a charge to noncontrolling interests in the income statement A reconciliation of the effective income tax rate to the federal rate is as follows a 44 View Help 's safer to stay in Protected View Enable Editing Federal income tax rate State taxes, net of federal benefit Domestic production activity deduction Other, including tax reserves and related interest 2012 35 0% 2.0 (2.5) (1.2) 33.3% 2011 35.0% 21 (23) (0.2) 34.6% 2010 35.0% 26 (1.7) (1.0) 34.9% 1. How much did Disney report as income tax expense in fiscal 2012? How much cash did Disney pay during the year for income taxes? In general, why do these numbers differ? 2. What is Disney's 2012 statutory tax rate? What is its 2012 effective tax rate? In general, why do these rates differ? 3. Why does Disney deduct a "valuation allowance from its net deferred tax liability in its income tax footnote? 4. Disney reports a net deferred tax liability of $1,486 million. How is this amount reflected on Disney's balance sheet? 5. Speculate as to why Disney reports in its income taxes footnote "depreciable, amortizable and other property as a deferred tax liability rather than a deferred tax asset. DF E a

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