Reading 29- Income Taxes Flashcards
Describe the differences between accounting profit and taxable income and define key terms, including deferred tax assets, deferred tax liabilities, valuation allowance, taxes payable, and income tax expense.
Accounting Profit= bottom line net income on the income statement
Taxable Income= net income- any additional deductions for business
Taxable Income- income that is taxable after your net income has subtracted deductions/tax write offs
Taxes Payable- yearly percentage claimed from taxable income for the US GOVT. This is taxes payable to the government and represents the total amount that was paid in taxes.
Income Tax Expense- income tax expense is related to what is calculated by the accountant which is more conservative
Tax Base- is the value of what is taxable from the subtraction of revenue and depreciation expenses (method used); the difference CREATES a NI to be TAXED.
Deferred Tax Assets- when you pay more taxes as opposed to what is written on the accounting books. This means that the depreciation expense is counted more conservatively for the US TAX RETURN.
Deferred Tax Liabilities- this means that you are paying less in taxes as opposed to what is written on your accounting books. This will catch-up to you later as all depreciating items will balance out accounts later on.
Valuation Allowance- valuation allowance is the DTAs difference that you have accrued which will help cut your expenses in the future reporting periods.
Explain how deferred tax liabilities and assets are created and the factors that determine how a company’s deferred tax liabilities and assets should be treated for the purposes of financial analysis.
DTLs are created when paying less in taxes to the US govt than is recorded on IS statement.
DTAs are created when “Expenses are smaller on the IS and create more tax base which leads to lesser reportable income later”
Calculate the tax base of a company’s assets and liabilities.
Tax Base= Revenues- CHOICE OF DEP EXP
Calculate income tax expense, income taxes payable, deferred tax assets, and deferred tax liabilities, and calculate and interpret the adjustment to the financial statements related to a change in the income tax rate.
WE NEED PRACTICE PROBLEMS FOR THIS ONE!
Evaluate the effect of tax rate changes on a company’s financial statements and ratios.
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Distinguish between temporary and permanent differences in pre-tax accounting income and taxable income.
Temporary Differences may be due to depreciation expense method which causes DTAs/DTLs.
Permanent Differences are not like that and do NOT create DTAs/DTLs.
Describe the valuation allowance for deferred tax assets- when it is required and what effect it has on financial statements.
Valuation allowance is an account that Richard the accountant should be taking track of. He should KNOW the amount of MORE MONEY we gave to IRS.
- IF HE DOESN’T KNOW and MONEY IS NOT REALIZED, then we have to create a valuation allowance.
- if NOT REALIZED, WE JUST PAY MORE TAXES.
Explain recognition and measurement of current and deferred tax items.
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Analyze disclosures relating to deferred tax items and the effective tax rate reconciliation and explain how information included in these disclosures affects a company’s financial statements and financial ratios.
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Identify the key provisions of and differences between income tax accounting under International Financial Reporting Standards (IFRS) and US generally accepted accounting principles (US GAAP).
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