Accounting for Income Taxes_Student File.doc - Accounting...

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Accounting for Income TaxesGeneralThe amount of taxes imposed by the government is the amount of income tax payablecompanies accrue on a periodic basis.Income tax payable does not equal income tax expenseCompanies preparefinancial statementsfor shareholders (and other users) using rulesunder GAAP (accrual basis).Companies also prepare theircorporate income tax returnsusing rules under theInternal Revenue Code (IRC)(modified cash basis).The two different sets of rules recognize revenues and expenses differently in manycases and, as a result, can yield markedly different levels of income.In general, Companies use IRC rules to report lower taxable income to taxing authoritiesthan they do to their shareholders so that they can reduce their tax liability and increaseafter-tax cash flow.This practice is acceptable so long as the financial statements are prepared in conformitywith GAAP and the tax returns are filed in accordance with the IRC.1.Creation of Deferred Income Tax AssetsFor financial reporting, companies record and report on the GAAP financial statementsexpenses based on period-end estimates, such as:Bad Debt ExpenseWarranty ExpenseRestructuring AccrualsThese expenses, however, will not be reported on a company’s corporate tax return untila subsequent period when the company actually:Writes off customer accountsIncurs warranty costsIncurs restructuring costsOrcompanies receiveAdvances from Customers, which are included as revenue on theIRC corporate tax return when they are received but won’t be reported on thesubsequent GAAP Income Statement until they have been earned1.The timing of the recording of expenses on the GAAP financial statements and thesubsequent manifestation and reporting of those actual costs on the IRC corporatetax returnand/or2.The timing of the reporting ofAdvances from Customerson the IRC corporate taxreturn and the subsequent manifestation and recording of those earned revenueson the GAAP income statement3.Creates temporary differences between GAAP Income Before Income Taxes and IRCTaxable Income - which ultimately results in differences in income tax expense1
reported on the GAAP income statement and income tax payable reported on theIRC corporate tax return

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Term
Spring
Professor
CynthiaH.Hollenbach
Tags
Balance Sheet, Depreciation, Progressive Tax, Generally Accepted Accounting Principles

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