M7 - Special Purpose Frameworks

Question 1

How does the tax-basis F/S differ from those prepared under GAAP?

Answer 1

The income tax basis recognizes certain revenues and expenses in different reporting periods.

Income tax-basis F/S recognize events when taxable income or deductible expenses are recognized on the entity’s tax return. Non-taxable income and non-deductible expenses are shown on the F/S and included in the determination of income (and become M-1 adjustments to arrive at taxable income).

Question 2

True or false: Capitalizing inventory is a common modification used to prepare modified cash basis F/S.

Answer 2

True