Taxable vs. Accounting Income

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Questions and Answers

What method do companies typically use for financial reporting?

Full accrual method (correct)
Cash basis accounting
Modified cash basis
Tax basis accounting

Which statement accurately reflects the difference between taxable income and accounting income?

Accounting income uses tax accounting methods.
Companies often apply different accounting methods for tax and financial reporting. (correct)
Taxable income is calculated under full accrual consistently.
Taxable income is reflective of the cash basis only.

Which basis is generally used for tax reporting by companies?

Modified cash basis (correct)
Full accrual method
Full cash basis
Hybrid method

Why might companies face discrepancies between their taxable and accounting income?

<p>Accounting and tax methods can vary based on preceding standards. (C)</p> Signup and view all the answers

Which of the following accurately describes the reporting methods used for tax purposes?

<p>Companies prefer modified cash basis for tax and full accrual for financial reporting. (D)</p> Signup and view all the answers

Flashcards

Taxable vs. Accounting Income

Taxable income differs from accounting income because companies use different accounting methods for tax and financial reporting.

Tax Reporting Method

The accounting method used for tax reporting, often full accrual (recognizing income and expenses when they are earned or incurred, not just when cash is received or paid).

Financial Reporting Method

The accounting method used when preparing financial statements for investors and creditors; often modified cash basis (recognizing income and expense when cash is received or paid.)

Correct Option - Taxable Income vs. Accounting Income

Companies apply the full accrual method for tax purposes and the modified cash method for financial reporting (option d).

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Study Notes

Taxable vs. Accounting Income

Taxable income differs from accounting income due to differing accounting methods used for tax and financial reporting.
Companies use the full accrual method for financial reporting, while using the modified cash basis for tax reporting.