Question

Which of the following best describes how to account for the difference between a company's financial income and taxable income, under generally accepted accounting principles? Computation of deferred income tax based on temporary and permanent differences. Computation of deferred income tax based on permanent differences. Computation of income tax expense based on taxable income. Computation of deferred tax assets and liabilities based on temporary differences.

Answer 1

Answer:

The answer is D. Computation of deferred tax assets and liabilities based on temporary differences.

Explanation:

Financial income is the revenue minus total cost before deducting for tax. It is known as income before tax.

Taxable income is the amount on which tax is to be deducted from. Usually financial income will be used as the base figure for determining the tax payable.

Deferred tax liability is the tax payable i.e the amount of tax that will be carried to the next accounting year.

Deferred tax liability is the tax receivable. This arises as a result of over payment of tax in the current period which the tax authority will need to refund.

The temporary differences are the differences between the net book value (carrying amount) of a liability and an asset and its tax base(financial income) . The tax base is the financial income.

So the computation of tax asset and liability is based on temporary differences