Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

Financial Accounting

3. Accrual Accounting Concepts

Revenue Recognition and Expense Recognition

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Multiple Choice

Taxable income of a corporation differs from pretax financial income because of which of the following?

Temporary and permanent differences in income recognition

The use of cash basis accounting for both tax and financial reporting

Identical treatment of all revenues and expenses under tax and GAAP rules

The requirement to use the same depreciation methods for tax and financial statements

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Verified step by step guidance

Understand the concept of taxable income and pretax financial income. Taxable income is the amount of income subject to tax as determined by tax laws, while pretax financial income is the income reported on the financial statements before income tax expense is deducted.

Recognize that taxable income and pretax financial income can differ due to temporary and permanent differences. Temporary differences arise when income or expenses are recognized in different periods for tax and financial reporting purposes, while permanent differences occur when certain items are recognized for one purpose but not the other.

Evaluate the incorrect options: The use of cash basis accounting for both tax and financial reporting is not correct because corporations typically use accrual accounting for financial reporting, and tax reporting may follow different rules. Identical treatment of all revenues and expenses under tax and GAAP rules is incorrect because tax laws and GAAP have different recognition criteria. The requirement to use the same depreciation methods for tax and financial statements is incorrect because tax laws may allow accelerated depreciation methods, while GAAP may require straight-line depreciation.

Focus on the correct answer: Temporary and permanent differences in income recognition are the primary reasons for the discrepancy between taxable income and pretax financial income. Temporary differences will reverse over time, while permanent differences do not.

Conclude that understanding these differences is essential for preparing accurate financial statements and tax returns, as well as reconciling the two for reporting purposes.