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Chapter 13 Taxes

Chapter 13 Taxes. Understand the purposes of income and other taxes. Contrast the purpose of taxes and financial reporting. Distinguish between the cash and allocation approach to taxes. Liabilities: Taxes. Taxing subject Seinfeld ….. Ward and June Beav and Wally Eddie Haskel

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Chapter 13 Taxes

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  1. Chapter 13 Taxes • Understand the purposes of income and other taxes. • Contrast the purpose of taxes and financial reporting. • Distinguish between the cash and allocation approach to taxes.

  2. Liabilities: Taxes • Taxing subject • Seinfeld….. • Ward and June • Beav and Wally • Eddie Haskel • Go to your room!

  3. Why Taxes? • Five purposes of taxes • Any preferences…. • So…purpose of Taxes vs. Financial Accounting

  4. Liabilities - Taxes • Taxes on the Income Statement, Exhibit 13.2… • Inconsistency? • Leads to accounting problem.

  5. Accounting for Taxes • Accounting options • cash: tax = tax paid • allocation: tax = EBT x Tax rate…. • Tax payable based on return. • Tax expense based on ni. • Balancing dr. or cr.?

  6. Tax Allocation • Pro: • extension of accrual • matching • smoothing ni • evens (not Evans) out. Exhibit 13.3 • Con: • an expense….? • smoothing ni • not even out. Exhibit 13.4 • uncertainty in I/S: tax changes • fictional accounting • So…perfectly appropriate and perfectly consistent leads to confusing and controversial accounting.

  7. Taxes • Pronouncements • APB O11 (1967) Comprehensive allocation and deferred charges and credits • SFAC 3 (1980) oops. No deferred charges and credits allowed. • SFAS 96 (1987, deferred 3 times) double oops. Asymmetrical tax assets and liabilities. • SFAS 109 (1992) asset if >50% !

  8. Taxes: Conclusions • 3 Difficult Questions • 1. Are taxes an expense? • 2. Can you have a liability….. • 3. What’s the event?

  9. Taxes • Discussion Case 13.1: Rustbelt Manufacturing, GAAP vs. CF! • Updates….

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