LO 7 Flashcards
(24 cards)
6 major principles that well-functioning taxation systems have
- neutrality
- efficiency
- certainty and simplicity
- fairness
- flexibility
- equity
neutrality
same principles should apply to all forms of business
flexibility
tax systems should be able to keep pace with technological and commercial developments
horizontal equity
taxpayers in similar circumstances should face a similar tax liability
vertical equity
how much the wealthy should pay in taxes relative to the poor
two basic models used to assess taxable income
receipts-and-outgoings
balance-sheet-system
receipts-and-outgoings
taxable income is the difference between all income and deductible expenses during a reporting period
balance-sheet-system
taxable income is determined by comparing the company’s total assets at the end of the reporting period (plus any amount distributed to shareholders) with the company’s total assets at the beginning of the reporting period
a stable corporate tax system is uniform in its accounting treatment and avoids these 5 issues
- inflation of expense deductions to lower taxable income
- large variations in the recognition of capital expenditures
- deferring recognition of gains on fixed assets, thereby deflating total assets
- deferring revenue recognition to deflate gross and taxable income
- manipulation of total liabilities to deflate total assets
income tax payable
a balance sheet liability that represents the amount of taxes a company owes based on their tax rate
tax expense
income statement item that represents income taxes payable net of changes to deferred tax assets and liabilites
deferred tax assets
a balance sheet asset that essentially represents “prepaid taxes” that the company will recover in future periods
deferred tax liabilities
a balance sheet liability that represents taxes owed over future periods
income tax paid
actual cash outflow paid for income tax and reduction to income tax payable liablity
tax base of assets/liabilites
the amount at which the asset/liability is valued on the balance sheet for tax purposes
carrying amount of assets/liabilites
the amount at which the asset/liability is valued on the balance sheet based on accounting principles
if the carrying amount is greater than the tax base for an asset
deferred tax liability
if the carrying amount is less than the tax base for an asset
deferred tax asset
if the carrying amount is greater than the tax base for a liability
deferred tax asset
if the carrying amount is less than the tax base for a liability
deferred tax liability
deferred taxes are not
discounted to present values when calculating the asset/liability amount
deferred taxes are recognized only when
there is a reasonable expectation that future profits will be earned to settle them
deferred taxes are calculated based on
future expected tax rates from the period in which they are expected to settle, not current tax rates
deferred taxes are revalued every reporting period based on changes in these 4 things
tax rates
expected settlement date
expectations of future profits
tax legislation
