Chapter 5 (2) - PART THREE The Measurement of Taxable...

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PART THREE The Measurement of Taxable Income CHAPTER 5 Taxable Income from Business Operations CHAPTER 6 Property Acquisitions and Cost Recovery Deductions CHAPTER 7 Property Dispositions CHAPTER 8 Nontaxable Exchanges
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5 Taxable Income from Business Operations Learning Objectives After studying this chapter, you should be able to: 1. Describe the relationship between a firm's business operating cycle and its choice of taxable year. 2. Explain the realization and matching principles of income measurement. 3. Compare the cash method and the accrual method of accounting as they relate to the measurement of net income. 4. Contrast the principles of conservatism reflected by generally accepted accounting principles (GAAP) and by the tax law. 5. Identify the tax policy objectives that lead to differences in the computation of book income and taxable income. 6. Differentiate between a permanent and a temporary book/tax difference. 7. Define the doctrine of constructive receipt for cash basis firms. 8. Recognize the common differences between the calculation of book and taxable income for accrual basis firms. 9. Explain how the net operating loss deduction allows firms to smooth taxable income over time. he keynote of the text to this point has been the role of taxes in the business decision-making process. We've been concerned with income and deduc- tions only in the generic sense and have worked through a series of hypothetical transactions demonstrating how income and deductions result in tax costs and tax savings. In turn, these costs and savings have been incorporated into cash flow models for computing the net present value of the transactions. T In Part Three of the text, our attention turns to the statutory, regulatory, and judicial rules governing the measurement of taxable income. Chapter 5 examines the impact of a firm's choice of a taxable year and a method of accounting on the measurement process, with emphasis on the differences between the computation of a firm's financial statement income and the income reported on its federal tax return. In contrast to earlier chapters, this chapter contains numerous references to specific sections of the Internal Revenue Code and Treasury regulations and to court cases pertaining to the computation of taxable income. We will analyze this
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100 Part Three The Measurement of Taxable Income new technical material in terms of its impact on cash flows and its relevance to the tax planning process. In doing so, we will accomplish one of the main objectives of Principles of Taxation for Business and Investment Planning —bridging the gap between finance courses that assume away knowledge of the tax law and traditional law courses that ignore the role of tax outcomes in the larger context of financial decision making. Business Profit as Taxable Income
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This note was uploaded on 12/14/2011 for the course ECONOM 110 taught by Professor Tuturukov during the Spring '11 term at London College of Accountancy.

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Chapter 5 (2) - PART THREE The Measurement of Taxable...

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