Reading 31 : Financial Statement Analysis

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Reading 31 : Financial Statement Analysis

What is accounting profit?

what is reporting on the income statement. Does not include a provision for tax expense

What is taxable income?

the portion of its income that is subject to income taxes

Accounting profit and taxable income differ mainly in one of these 4 ways?

1. revenue and expenses may be recognized in one period accounting wise and another for tax purposes
2. specific revenue or expenses may be recognized for accounting and not for tax purposes, or vice versa
3. the carrying amount and the tax base of assets and or liabilities may differ
4.deductibility of gains and losses may vary for account and income tax purposes

There can be permanent differences between taxable and accounting profit. The main two reasons for this difference are?

1. income or expense items not allowed by tax legislation
2. tax credits for some expenitures that directly reduces taxes

How do you calculate the reported effective tax rate?

= Income tax expense - pretax income (ie accounting profit)

If the carrying amount of an asset is > than the tax base, then it results in what?

Deferred tax liability

If the carrying amount of an asset is < than the tax base, then it results in what?

Deferred tax asset

If the carrying amount of a liability is > than the tax base, then it results in what?

Deferred tax asset

If the carrying amount of a liability is < than the tax base, then it results in what?

Deferred tax liability

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