Pretax Financial Income
Expense = Pretax Financial Income * Tax Rate
financial income is a financial reporting term
determined according to GAAP, full accrual method is
= Taxable Income * Tax Rate
taxes are paid on taxable income, which is the amount
reported to the government. Taxable income is not the
same as pretax financial income, which is the amount
reported on financial statements. In the financial
statements, pretax financial income minus related income
taxes equals net (financial) income.
income is calculated using current GAAP. In contrast,
taxable income is calculated using the Internal Revenue
Service (IRS) tax code. The two amounts are usually not
the same because the objectives of financial reporting
differ from those of the tax code. For example, the tax
code has provisions to encourage certain types of
economic activity, such as investment in new equipment.
In contrast, the objective of financial reporting is to
present information that will be useful to external
users in making decisions about companies.
types of temporary differences are taxable differences
and deductible differences.
of the differences between taxable income and financial
income are temporary and are referred to as temporary
differences. For example, some item that is included as
revenue for tax purposes in the current year is included
in financial income in the next year. Thus, the
difference is temporary because it reverses in the
future. Other types of differences that are not
temporary are referred to as permanent differences. For
example, certain types of income might never be taxable.
The two types of temporary differences are taxable
differences and deductible differences.