In workout B, it says, "Using the example above, is it a deferred tax assets or a deferred tax liability?" I can see we've got the deferred tax figures starting at 7,000 gradually going up and then coming down to 0. Well, I need to compare two things. I need to compare the accounting expense versus the tax allowable deduction. So the accounting expense, if we scroll up to the previous question, was 20,000 whereas the tax allowable deduction if I look into the tax section here the depreciation expense there was 40,000. Now I can copy those figures to the right and if I total them up, so some to the left, I can see it's the same amount each time. So we've got a temporary or timing difference only. Because we've got a temporary or timing difference, that means we're allowed deferred taxes. So is it deferred tax liability or an asset? Well, I need to compare those two figures. And in doing the relative expense line, I ask which of them is the greater. Well, I can see the tax allowable deduction of 40,000 is greater than the 20,000. So the tax allowable deduction greater than the accounting deduction.

Let's just do Year 1. So what's the impact on cash taxes because of that? Well, my expense going through the tax accounts is going to be higher. If my expenses are higher, profits in the tax accounts are gonna be lower. So high expense means low profit. Low profit means low taxes. Hey, that's fantastic! So your cash taxes that need to be paid based on the tax accounts are going to be lower. That's fantastic. It's gonna be good for my cash taxes. So cash taxes relative to tax expense are definitely going to be pay less. And if I pay less now, that means I'm going to pay more later. So I've got a liability coming up in the future. And that's how we determine that this is a deferred tax liability.

Now, exactly the same thing happens in Year 2. The tax deduction is greater than the accounting so I copy all of that to the right. In Year 3, slightly different. I can see the tax deduction and the accounting expense are the same. So impact on cash taxes is neutral. Cash taxes are equal to the tax expense. And in Year 4, something different has happened. Now the tax deduction is lower so tax is lower than the accounting. The impact on the cash taxes is bad. I'm going to have to pay more. And exactly the same thing happens in Year 5. Tax deduction is lower.

So I had a deferred tax liability in Years 1 to 2. The situation starts to reverse in Year 3. And then in Year 4 it's completely reversed. It's the opposite. Does that mean that my deferred tax liability becomes an asset? No. No, it does not. We determined in Year 1 that it was a liability. That means it will stay a liability for the five years. If we have a quick look up into Workout A. The deferred tax liability was 7,000. The liability increased. The liability plateaued. The liability came down and the liability eventually went to 0.