10_Tax vs Financial Accounting

10_Tax vs Financial Accounting - Objectives To understand...

Info iconThis preview shows pages 1–13. Sign up to view the full content.

View Full Document Right Arrow Icon
Objectives To understand the differences between tax accounting and financial accounting To understand the effects of events related to income taxes To interpret income tax disclosures.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Agenda 1. GAAP vs. Tax Code Background 2. Terminology 3. Tax Example 4. Tax Calculations 5. Deferral vs. Asset/Liability Approaches 6. 7. 8. Take-Aways
Background image of page 2
Differences Between GAAP and Tax Code Timing of Revenue Recognition - revenues collected in advance (unearned revenues) Timing of Expense Recognition - accounting for uncollectible receivables Other items – interest income from municipal bonds ( Not taxable)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Taxes – What to do? Acct - Expense Recognition Acct Yr 1 Yr 2 Revenue 1010 Expense (5) (5) Pre-tax 5 5 Tax Exp ? ? Net Income Tax – Faster Expense Recognition Tax Yr 1 Yr 2 Revenue 1010 Expense (10) (0) Taxable Inc. 010 Taxes Pay. 0 4 Note: Total Expense GAAP and Tax is equal – only timing differs The difference is said to be “Temporary”
Background image of page 4
Taxes – Possibility #1 Acct - Expense Recognition Acct Yr 1 Yr 2 Revenue 1010 Expense (5) (5) Pre-tax 5 5 Tax Exp 0 4 Net Income 5 1 Tax – Faster Expense Recognition Tax Yr 1 Yr 2 Revenue 1010 Expense (10) (0) Taxable Inc. 010 Taxes Pay. 0 4 report tax expense on income statement equal to the tax expense on the tax return
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Taxes – Possibility #2 Acct - Expense Recognition Acct Yr 1 Yr 2 Revenue 1010 Expense (5) (5) Pre-tax 5 5 Tax Exp 2 2 Net Income 3 3 Tax – Faster Expense Recognition Tax Yr 1 Yr 2 Revenue 1010 Expense (10) (0) Taxable Inc. 010 Taxes Pay. 0 4 Calculate tax expense based on GAAP income that is subject to tax (irrespective of when that income will experience tax effect – creates deferred Taxes)
Background image of page 6
Tax Terminology Statutory Tax Rate (STR) As specified by Federal and state Law Pre-Tax Income (or Earnings Before Taxes): income under GAAP Pre tax income reported on IS
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Tax Terminology Permanent Differences: Expense items on the IS that are never deductible for tax purposes (Penalties) revenue items on the IS that are never taxable (muni bond interest).
Background image of page 8
Tax Terminology Temporary or Timing Differences: created by recognizing revenue or expense in a different period for tax purposes than for financial reporting purposes. hence in any given year tax expense ≠ tax payable difference gives rise to Deferred tax assets and liabilities
Background image of page 9

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Tax Terminology Adjusted Pre-Tax Income (APTI): Pre- Tax income adjusted for permanent differences. Taxable Income: Income per tax statement = APTI adjusted for temporary differences.
Background image of page 10
Relation Pre-tax income (PTI) (+/-Permanent Differences) Adjusted Pre-tax Income (APTI) (+/-Temporary Differences) Taxable Income (TI) Tax expense = APTI x Statutory Tax Rate Taxes payable = TI x Statutory Tax Rate
Background image of page 11

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Tax Example - ABC ABC Corporation has one asset with a NBV of $10,000, which generates revenue (cash flows) of $5,000 per year. Depreciation
Background image of page 12
Image of page 13
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 53

10_Tax vs Financial Accounting - Objectives To understand...

This preview shows document pages 1 - 13. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online