Class 3 - Tax Income, Cash Flow - Accounting For Income Taxes August-16-14 9:11 AM Recall the matching principle A\/R Warranty Lib 1000,000 0 0 Warranty

Class 3 - Tax Income, Cash Flow - Accounting For Income...

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A/R 1000,000 0 Warranty Lib 0 40,000 Sales 0 1,000,000 Warranty Exp 40,000 0 Recall the matching principle: In income taxes, same principle as in liability - you match based on the income; GAAP -> Acct Income -> Acct Expense (Depreciation) This is not the same as: Income Tax Act -> Taxable Income -> Determine income tax payable (CCA) e.g. Acctt Inc: 100,000 and tax 20% -> $20,000 DR Inc Tax Expense 20k Inc Tax Payable 20 Problem: acct income and taxable income rarely equal in one year! Temporary Differences or Timing Differences: Timing difference: accounting depreciate using GAPP, and tax Act CCA Differences resulted in specific taxable income due to timing. Examples: Depreciation: Acct (GAAP) Tax 100,000 100,000 10% -> 10,000 20% -> 20,000 Warranty: Acct Tax Earned - Liab. Earned Permanent Differences Dividend connected -> income purposes (ACCT), but not taxable so not Tax purpose Work through step by step of getting to each component of the taxable income AI 100,000 Tax Rate 50% Or could be 16K CR with deferred Tax: 4,000 Differed taxes FTL / FTA Accounting For Income Taxes August-16-14 9:11 AM Class2 Page 1
AI 100,000 x 50% = 50,000 Expense, 50,000 TI 100,000 x 50% = 50,000 Pay, 50,000 Inc. Tax Expense 50,000 Inc. Tax Payable 50,000 Current Inc Tax Payable 50,000 Liab. Liab. Inc. Tax Payable 0 50,000 Income Before Tax 100,000 Income Tax Expense 50,000 NI For The Year 50,000 AI > TI Accounting income => Adjustments => Taxable Income Accounting Income 100,000 Depreciation +20,000 CCA (Cap. Cost Allowance) -50,000 (net effect -> Temporary diff) -30,000 Taxable Income 70,000 Inc. Tax Expense 50,000 Inc. Tax Payable 35,000 Future Tax Liab 15,000 Expense = Accounting Income is because of matching principle! Expense, Payable, Futures => always the same; I/S AI: 100,000 ITEYP Current 35,000 Future 15,000 50,000 NIFYR 50,000 Example: 2010 2011 2012 2013 2014 Sales $ 500,000 $ 450,000 $ 550,000 $ 600,000 $ 620,000 Exp $ 380,000 $ 310,000 $ 430,000 $ 480,000 $ 230,000 Depn $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 20,000 $ 400,000 $ 330,000 $ 450,000 $ 500,000 $ 250,000 Acct Inc $ 100,000 $ 120,000 $ 100,000 $ 100,000 $ 370,000 Tax Rate 40% 40% 40% 40% 40% CCA $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 <= add this back cuz it is taking out of the income statement <= subtract this because it can be allowed B/S Current IRTP 35,000 Future Tax Liab 15,000 Class2 Page 2
CCA $ 50,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000 Acct Inc. Tax Inc. Timing Diff Acc TD Asset 100,000 100,000 YR1 -20,000 -50,000 30,000 30,000 80,000 50,000 YR2 -20,000 -50,000

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