Companies have to file tax returns that are in accordance with tax regulations and rules developed by the Internal Revenue Service (IRS). The amounts reported under taxable income and financial income differs. These amounts are different because financial income is based on Generally Accepted Accounting Principles (GAAP) which uses the accrual method to report revenues. Taxable income on the other hand, which is determined by rules and regulations of the IRS, follow a modified cash basis to determine revenue. Therefore, it can be seen that these amounts differ because of the differences between tax regulations and GAAP.
The majorities of financial advisers do not have a formal accounting or tax background and thus have some challenges to overcome when reading tax returns of their clients. However they are still asked to help their clients in future planning. Since most accounting is to be done based on compliance with GAAP it would make sense to think that tax accounting should also be done this way, however both the IRS and the courts have stated that compliance with GAAP is of little significance when dealing with the objectives of tax accounting. The objectives of both accounting methods are simply different, because the primary goal of financial accounting is to provide useful information to all stakeholders and the primary goal of the income tax system is the equitable collection of revenue. Because of these differences it can be said that the users of accounting information are different for both methods. The assumption for financial accounting is the going-concern and the tax accounting system ignores this assumption. These differences give us the concept of timing differences and permanent differences. Understanding...
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...usiness & Economics Research, 10(3), 149-156.
DHALIWAL, D. S., GLEASON, C. A., & MILLS, L. F. (2004). Last-Chance Earnings Management: Using the Tax Expense to Meet Analysts' Forecasts. Contemporary Accounting Research, 21(2), 431-459.
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In this study I will use the cash effective tax rate (CASH ETR) as a proxy for corporate tax avoidance. Chen et al. (2010) use the cash effective tax rate as one of the measures of tax aggressiveness in their study. Another effective tax rate measure which has been widely used in tax avoidance research is the GAAP effective tax rate. However, the GAAP effective tax rate only reflects the permanent book-tax differences, while the CASH ETR reflects both the temporary and permanent book-tax differences (Chen et al. 2010). Moreover, the CASH ETR captures the tax benefits of employee stock options, while the GAAP effective tax rate does not (Dyreng et al. 2008). The CASH ETR also captures the strategies that are used to defer taxes while the GAAP effective tax rate does not (Hanlon and Heitzman 2010). The GAAP effective tax rate is also affected by changes in estimate while the CASH ETR is not. Therefore, Dyreng et al. (2008) conclude that t...
In this chapter there were presented three basic discounted cash flow methods for firm valuation that are often used in practice and which explicitly or implicitly include the value of the tax shield of debt. It should be mentioned, as Bertoneche and Federici (2006) and Fernandez (2007a) prove, that the different valuation methods give the same result for total value of the firm as well as for the value of the tax shield of debt, as long as the valuation methods rely on the same hypotheses and do not implicitly include any additional assumptions. Indeed, Fernandez (2007a) notes: “This result is logical, as all the methods analyze the same reality under the same hypotheses; they differ only in the cash flows taken as a starting point for the valuation.”
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Firstly, pro-forma earnings does not adhere to the strict guidelines that are enforced by GAAP, purely because the computed earnings results are projected and can be calculated by any number of measures that companies want to include, as there is not universal guidelines that must be followed when reporting pro-forma earnings. These measures that are included, or excluded, are decided by the company and they may not be recurring, and quite possibly be a once off occurrence. The occurrence of certain measure for accounting need to be stable and not just unsystematic because then the reported earnings will not be a true and accurate indication of future company performance and thus misleading investors when making decisions. The most common unaccepted practice when calculating pro-forma earnings is for companies to exclude information that could quite possibly be information that is important for shareholders to be aware of. Some of these measures may be excluded by companies to improve their reporting or make their future earnings performance look more promising. Companies may exclude but are not limited to information such as redundancies, depreciation in assets and obsolete stock to name a few. The intentional exclusion of information, or manipulation of measures, is widely unaccepted because investors are not informed of what is included and excluded. Although most firms exclude
In analyzing the common-size balance sheet for Applebee’s, it is noted that the total current assets has jumped from 11% to 14% of the total assets. The total assets for Applebee’s has jumped 6% from 2000 to 2001 driven by increased in the total current assets of 28%. Of those 28% increase, they consisted of 88% increase in the Cash & Equivalents (increased of $10.6 millions) caused by the decreased in the Capital Stock repurchasing in 2001 by Applebee’s. The repurchase of capital stock has decreased by 31% as noted from the year-to-year percentage changes of the Statement of Cash Flow which equivalent to about $11 million dollars. The other current assets increased was from the other Current Assets category; there was an increase of 92% from 2000 to 2001. Due to the higher earnings for Applebee’s, there was an increase in income tax due. A significant component of the increase of other Current Assets was from increased in prepaid income taxes with net deferred income tax asset of $6.7 millions dollars.
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...tion of Incomes of Corporations Among Dividens, Retained Earnings, and Taxes. The American Journal Review, 46(2), pp. 97-113.
This paper will discuss these steps in detail. Because I work at home, I am not currently involved in any of the steps of the accounting cycle. The examples I give in this paper will be from various jobs I have held in the past.
From 1967 thru 1980, firms followed the comprehensive tax allocation procedures under APB Opinion #11 and reported deferred charges and credits. However, some problems arose from doing so. Because of the changes in tax rates and the nature of firm's investment, the balance of deferred tax credits on a firm's balance sheet began to grow in size instead of reversing and canceling out.
Financial Accounting Standards Board. (2006, July 6). Conceptual Framework for Financial Reporting. Financial Accounting Series , 1-55.
Zavadszky, Andrea. "New Accounting Needs Data and Analysis Skills." Classified Post. N.p., 30 Nov. 2013. Web. 18 Mar. 2014. .
Maintaining a company’s financial assets is a daunting task. Cash management techniques and short-term financing provide accounting executives with the tools needed to survive the constant changes within the economy. The combination of these tools and the knowledge of the world economy will assist companies in maintaining current assets and facilitates growth.
"Accountants." WISCareers. University Of Wisconsin System Board of Regents, 2009. Web. 20 Nov. 2009. .