Accounting Theory – Deferred Taxes


If deferred taxes are an unfair loophole that must be closed provide a rationale for your response.  Imagine your boss has asked you to  “cook the books”., and increase earnings this quarter in order to compensate for lower revenues than expected.  Create a scenario where you would manipulate taxes in order to increase revenues.  Support your scenario with examples of such manipulation

Sample Answer – Deferred Taxes

Deferred taxes is created as a result of temporary differences between taxable and book income. This is created because of expense or revenue items which are acknowledged in one taxes period, but in a varying books period. In this case, the expense of total income tax acknowledged for books in a particular period of time can be paid over varying time period to the IRS. Alternatively the tax amount paid to the IRS in a particular period is acknowledged as expenses of book tax over varying periods. The deferred tax accounting is drive by the deferred tax liability and asset accounts. Deferred tax liabilities refers to taxes liabilities for taxes due in the prospect on income which has already been acknowledged for books. Although acknowledged in the book of income, the IRS allows the company to pay that tax later, mostly because of timing difference. Deferred tax assets refers to reductions in future payable taxes, since the taxes  already been paid on book income to be acknowledged in like a prepaid tax in the future (Accaglobal, 2012).

Read also Intermediate Accounting – Financial Reporting And Generally Accepted Accounting Principles

Deferred tax is actually a loophole that should be closed. Deferred taxes assist the company to create force situations for the investors of the company. For instance, tax liabilities makes the investors to see a higher income value though in the real sense the company net income should be far much less than the provided value as a result of tax which is not paid. Investors attracted by the company’s revenue with deferred tax liabilities are likely to receive less dividend than the anticipated value in the future, since the future income will be used to pay for the carried forward tax liability.  Alternatively, the company can reduce investors’ dividend earning by indicating non-existing deferred tax asset payment to reduce net income that determines the investors’ dividend earnings. The concept of deferred taxes creates loopholes for future losses for investors after investing with a company which in their perspective, they were sure of its financial position. In this regard, I believe that deferred tax liabilities are loopholes that may need to be closed to prevent more deceptions to investors, looking for a company will dependable financial records.

Read also Major Disclosure And Conceptual Objectives Of Consolidated Financial Statements

Normally, companies tend to manipulate their accounts books to attract investors while in the real sense their financial situation is terrible. After recording low revenue, a company may consider manipulating its books account by creating deferred tax liabilities or deferred tax assets. For instance, to reduce the divided to be earned by the company shareholders, the company can manipulate its accounting to demonstrated deferred tax assets which will demonstrate why the net income to determine divided earnings are low. The company will make investors believe that the company has paid previous deferred tax liabilities or/and deferred tax assets and thus, the current divided earnings will be much low due to these expenses. However, in the IRS accounts, the company will demonstrate the actual revenue and actual taxations and thus the net income in this case will be much higher while the net income in the investors reporting books will be much lower.

For instance, a company making that registered a revenue of $5000000 wishes to manipulate taxes to increase revenue. In this case, the actual taxation will reduce the revenue at a certain percentage. For instance 25% income taxation will result to net income of $375000. However, to attract more investors, the company may decide to manipulate taxes by creating deferred tax liability of 55%. In this regard, the company will mage to retain $68750 of the taxes needed to be paid during that period and use the tax to magnify its net revenue to $443750. This will attract more investors as compared to $375.

Share with your friends
Order Unique Answer Now

Add a Comment

Get Up 50% Discount on Your First OrderUp To 50% Off Your First Order Due in Less Than 48 Hours

Grab this first time Discount, and save up to 50% on your first Order Due in Less Than 48 Hours.