chap006-Analyzing-Operating-Activities(财务报表分析-台湾中兴大学)

6CHAPTERAnalyzingOperatingActivitiesMcGraw-Hill/Irwin©2004TheMcGraw-HillCompanies,Inc.,AllRightsReserved.IllustrationFacts:•Companywith$100,000incash•Buyscondofor$100,000•Rentscondofor$12,000peryear•Endofthefirstyear:Condovaluedat$125,000

IncomeMeasurement

ConceptsIllustrationFacts:•Net(free)cashflow=$(88,000)•Operatingcashflow=$12,000•Economicincome=$37,000•($12,000rentalincome+$25,000holdinggain)•Accountingincome=$11,500($12,000rentalincome-$500depreciation*)*Condo’susefullifeis50yearsanditssalvagevalueis$75,000—yearlystraight-linedepreciationis$500IncomeMeasurement

ConceptsEconomicIncome: Twomeasuresreflect theeconomicconcept

•economicincome •permanentincomeIncomeMeasurement

ConceptsEconomicIncome:• Equalsnetcashflows+thechangeinthepresentvalueof futurecashflows• Measureschangeinshareholdervalue—reflectingthe financialeffectsofalleventsinacomprehensivemanner• Includesbothrecurringandnonrecurringcomponents— renderingitlessusefulforforecastingfutureearnings potential

• RelatedtoHicksianconceptof income—incomeincludesboth realized(cashflow)and unrealized(holdinggainor loss)components

IncomeMeasurement

ConceptsPermanentIncome* •Equalsstableaverageincomethatacompany isexpectedtoearnoveritslife •Reflectsalong-termfocus •Directlyproportionaltocompany value •Oftenexpressedbydividing permanentincomeby costofcapital

*Alsocalledsustainableearningpower,orsustainableornormalizedearningsIncomeMeasurement

ConceptsEconomicIncomeandPermanentIncomeIncomeMeasurement

ConceptsAccountingConceptofIncome:•Basedonaccrualaccounting•Captureaspectsofbotheconomicincomeand permanentincome •Suffersfrom measurement problems—yields accountinganalysis

IncomeMeasurement

ConceptsRevenueRecognitionandMatching:Revenuerecognition Revenuesmustberealizedorrealizable,andearned

Costs/Expensesmatchedwithrecognizedrevenues Productcosts—recognizedwhenproductor servicesold Periodcosts--recognizedwhenincurredIncomeMeasurement

ConceptsEconomicIncomevs.AccountingIncome:EconomicIncomeandAccountingIncomereflectsimilarconceptsBUT:Accountingincomeisaproductofthefinancialreportingenvironment—accountingstandards,enforcementmechanisms,managers’incentives,etc.HENCE:Accountingincomecandivergefromeconomicincome(yieldingaccountingdistortions)IncomeMeasurement

ConceptsAccountingIncomeconsistsof:• PermanentComponent--therecurringcomponent expectedtopersistindefinitely• TransitoryComponent--thetransitory(ornon- recurring)componentnotexpectedtopersist (Note:Theconceptofeconomicincomeincludes bothpermanentandtransitorycomponents.)• ValueIrrelevantComponent--valueirrelevant componentshavenoeconomiccontent;theyare accountingdistortionsIncomeMeasurement

ConceptsAnalysisImplications:• Adjustingaccountingincomeis importanttask• Necessarytospecifyanalysis objectives--e.g.,determining economicincomeorpermanent incomeorsustainableearningpower•Adoptaninclusiveapproach— includingrecurringandnon-recurring componentsIncomeMeasurement

ConceptsIncomeMeasurement

MeasurementTwomaincomponentsofaccountingincome: Revenues(gains) Expenses(losses)SampleIncomeStatementIncomeMeasurement

MeasurementAmberCorp.andSubsidiaries

2001

Sales$14,314

$12,716

$13,033

Equityincome51

39

43

Interestincome

12

74

15

Costofgoodssold(8,333)

(7,567)

(8,001)

Grossprofit$6,044

$5,262

$5,090Expenses:

Sellingandadministrative$(2,964)

$(2,478)

$(2,396)

Researchanddevelopment(1234)

(899)

(855)

Restructuringcharge--

(1016)

--

Interestexpense(725)

(715)

(654)

Incomebeforetaxes$1,121

$154

$1,185

Incometaxes

(336)

(351)

(356)

Incomefromcontinuingoperations$785

$(197)

$830

Gainfromextinguishmentofdebt38

--

--

Lossfromoperatingdiscontinuedsegment--

0

(23)

Gainfromsaleofdiscontinuedsegment

--

--

66

Netincome$823

$(197)

$873

Foreigncurrencytranslationadjustments82

(54)

(31)

Unrealizedholdinggainsonavailable-for-salesecurities24

22

6

Additionalminimumpensionliabilityadjustment

0

(4)

--

Comprehensiveincome$929

$(233)

$848

20001999RevenuesandGains•Revenuesareearnedinflowsorprospective inflowsofcashfromoperations*•Gainsarerecognizedinflowsorprospective inflowsofcashfromnon-operations**

* Revenuesareexpectedtorecur**Gainsarenon-recurringIncomeMeasurement

MeasurementExpensesandLosses• Expensesareincurredoutflows,prospective outflows,orallocationsofpastoutflowsof cash fromoperations• Lossesaredecreasesinacompany’s netassetsarisingfrom non-operations

Expensesandlossesareresourceconsumed,spent,orlostinpursuingrevenuesandgains

IncomeMeasurement

MeasurementTwomajorincomedimensions:operatingversusnon-operatingrecurringversusnon-recurring*

*MotivatedbyneedtoseparatepermanentandtransitorycomponentsIncomeMeasurement

AlternativesOperatingvs.Non-OperatingandRecurringvs.Non-Recurring

IncomeMeasurement

AlternativesOperatingIncome

Non-OperatingIncome

RecurringIncome

Non-RecurringIncome

AlternativeIncomeStatementMeasures• Netincome—widelyregardedas“bottomline”measureof income • Comprehensiveincome--includesmostchangesto equitythatresultfromnon-ownersources;itisactuallythe bottomline measureofincome;istheaccountant’sproxy foreconomicincome• Continuingincome--excludesextraordinaryitems, cumulative effectsofaccountingchanges,andtheeffects ofdiscontinuedoperationsfromnetincome• Coreincome--excludesallnon-recurringitemsfromnet income*Oftenerroneouslyreferredtoas“operatingincome”IncomeMeasurement

AlternativesIncomeMeasurement

AnalysisWhatconstitutesthe‘correct’measureofincomeforanalysispurposes?

Thereisnoanswerfortworeasons: •Correctmeasurementdependsonanalysis objectives •Alternativeaccountingincomemeasures resultfromincludingorexcludingline items—stillsubjecttoaccountingdistortionsIncomeMeasurement

AnalysisOperatingversusNon-OperatingIncome

Operatingincome--measureofcompanyincomeasgeneratedfromoperatingactivities

ThreeimportantaspectsofoperatingincomePertainsonlytoincomegeneratedfromoperationsFocusesonincomeforthecompany,notsimplyforequityholders (meansfinancingrevenuesandexpensesareexcluded)Pertainsonlytoongoingbusinessactivities(i.e.,resultsfrom discontinuedoperationsisexcluded)

Non-operatingincome--includesallcomponentsofnetincomeexcludedfromoperatingincome

Usefultoseparatenon-operatingcomponentspertainingtofinancingandinvesting

IncomeMeasurement

AnalysisCleanSurplusArticulationofincomewithequityinsuccessivebalancesheets--i.e.,incomeaccountsforallchangesinequityfromnon-ownersources

DirtySurplusAccountingallowscertaincomponentsofincometobypassincomeasdirectadjustmentstoequity

HENCENetincomeisgenerallyaproduceofdirtysurplusaccountingComprehensiveincomeisaproductofcleansurplusaccounting

IncomeMeasurement

AnalysisDeterminationofComprehensiveIncome—samplecompany

Netincome Othercomprehensiveincome:+/-Unrealizedholdinggainorlossonmarketablesecurities +/-Foreigncurrencytranslationadjustment+/-Additionalminimumpensionliabilityadjustment+/-UnrealizedholdinggainorlossonderivativeinstrumentsComprehensiveincome

IncomeMeasurement

AnalysisComprehensiveIncomeAccountant’sproxyforeconomicincome*Revenueandexpensecomponentsmustbeadjustedinestimatingeconomicincome(confinetothefourusualitems):IncludeunrealizedgainsandlossesfrominvestmentsecuritiesIncludeforeigncurrencytranslationadjustmentsExcludeadditionalminimumpensionliabilityadjustmentIncludechangeinpensionfundedstatus(pensionassetslesspensionobligations)

*Manycomponentsofcomprehensiveincomeareirrelevantfordeterminingpermanentincome

Non-RecurringItems

ExtraordinaryitemsDiscontinuedsegmentsAccountingchangesRestructuringchargesSpecialitems

Non-RecurringItems

ExtraordinaryItems

CriteriaUnusualinnatureInfrequentinoccurrenceExamplesUninsuredlossesfromamajorcasualty(earthquake,hurricane,tornado),lossesfromexpropriation,andgainsandlossesfromearlyretirementofdebtDisclosureClassifiedseparatelyinincomestatement

Non-RecurringItems

ExtraordinaryItems

Non-RecurringItems

ExtraordinaryItems

Extraordinaryitems:

Arenon-recurringExcludedwhencomputingpermanentincomeIncludedwhencomputingeconomicincomeCanrevealriskexposuresCanimpactcomputationofsustainableearningpowerOftenExcludedwhenmakingcomparisonsovertimeoracrossfirms

Non-RecurringItems

DiscontinuedOperations

Non-RecurringItems

DiscontinuedOperations

Accountingistwo-fold:IncomestatementsforthecurrentandpriortwoyearsarerestatedafterexcludingtheeffectsofdiscontinuedoperationsGainsorlossesfromthediscontinuedoperationsarereportedseparately,netoftax*

*Reportedintwocategories:(i)operatingincomeorlossfromdiscontinuedoperationsuntilthemeasurementdate,and(ii)gainsandlossesondisposal

Non-RecurringItems

DiscontinuedOperations

Foranalysisofdiscontinuedoperations:AdjustcurrentandpastincometoremoveeffectsofdiscontinuedoperationsCompaniesdisclosethisinfoforthecurrentandpasttwoyearsForearlieryears:LookforrestatedsummaryinfoorothervoluntarydisclosuresTakecarewhendoinginter-temporalanalysisAdjustassetsandliabilitiestoremovediscontinuedoperationsRetaincumulativegainorlossfromdiscontinuedoperationsinequity

Non-RecurringItems

AccountingChanges

Accountingchangesareof3types:AccountingprinciplechangeAccountingestimatechangeReportingentitychangeNon-RecurringItems

AccountingChanges

AccountingPrincipleChange—involvesswitchfromoneprincipletoanother

Disclosureincludes:NatureofandjustificationforchangeEffectofchangeoncurrentincomeandearningspershareProformaeffectsofretroactiveapplicationofchangeonincomeandEPSforincomestatementyearsNon-RecurringItems

AccountingChanges

AccountingEstimateChange—involveschangeinestimateunderlyingaccounting

Prospectiveapplication—achangeisaccountedforincurrentandfutureperiodsDiscloseeffectsoncurrentincomeandEPSNon-RecurringItems

AccountingChanges

ReportingEntityChange—involvesinitialpublicationofconsolidatedstatements,orchangeinconsolidationpolicy,orapoolingofinterest

Restateallpriorperiods’financialstatementsanddisclosingthenatureofchange

Non-RecurringItems

AccountingChanges

AnalyzingAccountingChangesArecosmeticandyieldnocashflowsCanbetterreflecteconomicrealityCanreflectearningsmanagement(orevenmanipulation)Impactcomparativeanalysis(apples-to-apples)EffectbotheconomicandpermanentincomeForpermanentincome,usethenewmethodandignorethecumulativeeffectForeconomicincome,evaluatethechangetoassesswhetheritreflectsreality

Non-RecurringItems

SpecialItems

SpecialItems--transactionsandeventsthatareunusualorinfrequent

ChallengesforanalysisOftenlittleGAAPguidanceEconomicimplicationsarecomplexDiscretionarynatureservesearningsmanagementaims

TwomajortypesAssetimpairments(write-offs)RestructuringchargesNon-RecurringItems

SpecialItems

Non-RecurringItems

SpecialItems

Non-RecurringItems

Break-UpOne-TimeCharges(SpecialItems)Non-RecurringItems

Break-UpOne-TimeCharges(SpecialItems)Non-RecurringItems

SpecialItems

AssetImpairment—whenassetfairvalueisbelowcarrying(book)value

SomereasonsforimpairmentsDeclineindemandforassetoutputTechnologicalobsolescenceChangesincompanystrategy

AccountingforimpairmentsReportatthelowerofmarketorcostNodisclosureaboutdeterminationofamountNodisclosureaboutprobableimpairmentsFlexibilityindeterminingwhenandhowmuchtowrite-offNoplanrequiredforassetdisposal

ConservativepresentationofassetsNon-RecurringItems

SpecialItems

RestructuringCharges—costsusuallyrelatedtomajorchangesincompanybusiness

ExamplesofthesemajorchangesincludeExtensivereorganizationDivestingbusinessunitsTerminatingcontractsandjointventuresDiscontinuingproductlinesWorkerretrenchmentManagementturnoverWrite-offscombinedwithinvestmentsinassets,technologyormanpower

AccountingforestimatedcostsofrestructuringprogramEstablishaprovision(liability)forestimatedcostsChargeestimatedcoststocurrentincomeActualcostsinvolveadjustmentsagainsttheprovisionwhenincurredNon-RecurringItems

SpecialItems

AnalyzingspecialitemsischallengingandimportantChallengesarisefromlackofguidanceinaccountingstandardsChallengesalsoariseinunderstandingtheeconomicsofspecialitemsImportancerelatestothefrequencyandimpactonpast,present,andfutureincomeNon-RecurringItems

SpecialItems

EarningsManagementwithSpecialCharges(1)

Specialchargesoftengarnerlessinvestorattentionunderanassumptiontheyarenon-recurringanddonotpersist(2)

Managersmotivatedtore-classifyoperatingchargesasspecialone-timecharges(3)Whenanalystsignoresuchre-classifiedchargesitleadstolowoperatingexpenseestimatesandoverestimatesofcompanyvalueEarningsManagementwithSpecialCharges—AnIllustrationCompanyearns$2pershareinperpetuityCostofcapitalis10%Companyvaluationis$20($2/0.10)Companyoverstatesrecurringearningsby$1persharefor4periodsandthenreversesthiswithasinglechargeinthefourthyear:($pershare) Year1 Year2 Year3 Year4

Recurringearnings $2+$1 $2+$1 $2+$1 $2+$1Specialcharge --

--

--

(4)

NetIncome $3 $3 $3 $(1)

Analysis(1) Suggestspermanentcomponentof$3pershareandatransitorycomponentof $(4)pershareinYear4(2) Companystockisvaluedat$26([$3/0.10]-$4)(3) Ignoringspecialcharges(assomeanalystsadvise)yieldsstockvaluedat$30($3 /0.10)Non-RecurringItems

SpecialItems

Non-RecurringItems

SpecialItems

EarningsManagementwithSpecialCharges—GraphicalIllustration

Non-RecurringItems

SpecialItems

IncomeStatementAdjustments

(1)Permanentincomereflectprofitabilityofacompany undernormalcircumstances

•Mostspecialchargesconstituteoperatingexpenses thatneedtobereflectedinpermanentincome

•Specialchargesoftenreflecteitherunderstatements ofpastexpensesorinvestmentsforfutureprofitability

(2) Economicincomereflectstheeffectsonequityofall eventsthatoccurintheperiod

•Entireamountofspecialchargesisincluded

Non-RecurringItems

SpecialItems

BalanceSheetAdjustmentsBalancesheetsafterspecialchargesoftenbetterreflectbusinessrealitybyreportingassetsclosertonetrealizablevalues

Twoadditionalpoints(1) Retainprovisionornetagainstequity? •Ifagoing-concernanalysis,thenretain

•Ifaliquidatingvalueanalysis,thenoffsetagainstequity

(2) Assetwrite-offsconservativelydistortassetandliability values

RevenueRecognitionCriteriaEarningactivitiesaresubstantiallycompleteandnosignificantaddedeffortisnecessaryRiskofownershipiseffectivelypassedtothebuyerRevenue,andrelatedexpense,aremeasuredorestimatedwithaccuracyRevenuerecognizednormally yieldsanincreaseincash, receivablesorsecuritiesRevenuetransactionsareatarm’s lengthwithindependentpartiesTransactionisnotsubjecttorevocation

RevenueRecognitionGuidelines

SomespecialrevenuerecognitionsituationsareRevenueWhenRightofReturnExistsFranchiseRevenuesProductFinancingArrangementsTransfersofReceivableswithRecourseRecognitionatCompletionofProductionRevenueunderContractsPercentage-of-completionmethodCompleted-contractmethodUnearnedFinanceChargesRecognizing“Sales”toLeasingSubsidiaries

RevenueRecognitionUncertaintyRevenueisimportantforCompanyvaluationAccounting-basedcontractualagreementsManagementpressuretoachieveincomeexpectationsManagementcompensationlinkedtoincomeValuationofstockoptions

AnalysismustassesswhetherrevenuereflectsbusinessrealityAssessriskoftransactionsAssessriskofcollectibility

CircumstancesfuelingquestionsaboutrevenuerecognitionincludeSaleofassetsoroperationsnotproducingcashflowstofundinterestordividendsLackofequitycapitalExistenceofcontingentliabilities

RevenueRecognitionAnalysis

CostsincurredbutdeferredbecausetheyareexpectedtobenefitfutureperiodsConsiderfourcategoriesofdeferredcosts ResearchanddevelopmentComputersoftwarecostsCostsinextractiveindustriesMiscellaneous(Other)

DeferredChargesR&Dcostsinclude:Materials,equipment,andfacilitiesacquiredorconstructedforaR&DprojectPurchasedintangibleswithnoalternativefutureusesMaterialsconsumedinR&DactivitiesDepreciationofequipmentorfacilities,andamortizationofintangibleassets,usedinR&DactivitieswithalternativefutureusesSalariesandotherrelatedcostsof personnelengagedinR&DServicesperformedbyothersinconnection withR&DAllocationofindirectcosts,excludinggeneral andadministrative

DeferredChargesResearchandDevelopment

AccountingforR&Disproblematicdueto:*HighuncertaintyofanypotentialbenefitsTimeperiodbetweenR&DactivitiesanddeterminationofsuccessIntangiblenatureofmostR&DactivitiesDifficultyinestimatingfuturebenefitperiods

Hence:U.S.accountingrequiresexpensingR&DwhenincurredOnlycostsofmaterials,equipment,andfacilitieswithalternativefutureusesarecapitalizedastangibleassetsIntangiblespurchasedfromothersforR&Dactivitieswithalternativefutureusesarecapitalized

*Theseaccountingproblemsaresimilartothoseencounteredwithemployeetrainingprograms,productpromotions,andadvertising

DeferredChargesResearchandDevelopment

AnalysisofR&Dischallengingbecause:FuturebenefitsareusuallycreatedfromR&DConceptually,R&DshouldnotbeexpensedasincurredExpensingR&DimpairsearningsusefulnessMarketoftenrewardsastockpriceforR&DUnderstatesR&DassetsAccountingignoresexperiences ofmanyongoingR&DactivitiesFailstoserveneedsandinterests ofmanyanalysts

DeferredChargesResearchandDevelopment

DeferredChargesResearchandDevelopment

Analysisneeds/wantsincludeTypesofresearchperformedR&DoutlaysbycategoryTechnicalfeasibilityCommercialviabilityPotentialofR&DprojectsPriorsuccess/failurewithR&D[Note:Accountingforcostsofcomputersoftwaretobesold,leased,orotherwisemarketedidentifiesapointreferredtoastechnologicalfeasibility]

Priortotechnologicalfeasibility,costsareexpensedwhenincurred

Aftertechnologicalfeasibility,costsarecapitalizedasanintangibleasset

DeferredChargesComputerSoftwareCostsSearchanddevelopmentcostsfornaturalresourcesisimportanttoextractiveindustriesincludingoil,gas,metals,coal,andnonmetallicminerals

Twobasicaccountingviewpoints:“Full‑cost”view—allcosts, productiveandnonproductive, incurredinthesearchforresources arecapitalizedandamortizedto incomeasresourcesareproduced andsold“Successfulefforts”view—allcoststhatdonotresultdirectlyindiscoveryofresourceshavenofuturebenefitandshouldbeexpensedasincurred

DeferredChargesCostsinExtractiveIndustriesDeferredChargesOtherDeferredCostsDeferredchargesareoftensubstantialValidatingmanydeferredchargesdependsonestimatesAssessingthebenefitperiodtoamortizedeferredchargesisdifficultAnalysismustbealerttodeferredchargesthatdonotcarryfuturebenefitsDescriptionsofdeferredcostsareusefulinanalysisDeferredchargesaregenerallyincapableofsatisfyingcreditors’claimsAssesspropensityofmanagementtodefercosts

IncreaseinemployeebenefitssupplementarytosalariesandwagesSomesupplementarybenefitsarenotaccordedfullortimelyrecognition:CompensatedabsencesDeferredcompensationcontractsStockappreciationrights(SARs)JuniorstockplansEmployeeStockOptions(ESOs)

EmployeeBenefitsOverviewESOsareapopularformofincentivecompensation—reasonsinclude:EnhancedemployeeperformanceAlignemployeeandcompanyincentivesViewedasmeanstorichesTooltoattracttalentedandenterprisingworkersDonothavedirectcashfloweffectsDonotrequiretherecordingofcostsEmployeeBenefitsEmployeeStockOptionsOptionFactsOptiontopurchasesharesataspecificpriceonorafterafuturedateExercisepriceisthepriceaholderhastherighttopurchasesharesatExercisepriceoftensetequalto stockpriceongrantdateVestingdateistheearliestdate theemployeecanexercise optionIn-the-Money:Whenstock priceishigherthanexercise priceOut-of-the-Money:Whenstockprice islessthanexerciseprice

EmployeeBenefitsEmployeeStockOptionsEmployeeBenefitsEmployeeStockOptions

IllustrationofanOptionGrantedtoanEmployee

Grant Vesting Exercise Date Date Date

VestingPeriod

|---------------------------------------------|--------------------------------------------------|

Stock Stock Stock Price Price Price

$10 $15 $21

TwomainaccountingissuesDilutionofearningspershare(EPS)ESOsin-the-moneyaredilutivesecuritiesandaffectdilutedEPSESOsout-of-the-moneyareantidilutivesecuritiesanddonotaffectdilutedEPSCostrecognitionofESODeterminecostofESOsgrantedAmortizecostovervestingperiod

EmployeeBenefitsEmployeeStockOptionsEmployeeBenefitsEmployeeStockOptionsFactor EffectonfairvalueExerciseprice -Stockpriceondateofgrant +Expectedlifeofoption +Risk-freerateofinterest +Expectedvolatilityofstock +Expecteddividendsonstock -EmployeeBenefitsEmployeeStockOptionsESODisclosuresProformaincomeandEPSNotedetailsonoptionsgranted,outstanding,andexercisableAssumptionsforcomputingfairvalueofoptionsgranted

InterestandTaxesInterestDefinedInterest Compensationforuseofmoney Excesscashpaidbeyondthemoney(principal) borrowed

Interestrate Determinedbyriskcharacteristicsofborrower

Interestexpense Determinedbyinterestrate,principal,andtimeInterestandTaxesInterestCapitalizationAccountingrequiresinterestcapitalizationwhenasset• constructedor producedfora company’sownuse• constructedor producedfora companybyothers wheredepositsor progresspayments aremade

AimsofinterestcapitalizationBettermeasureassetacquisitioncost(2)Betteramortizeacquisitioncostagainstrevenues generated

InterestandTaxesInterestAnalysisInterestonconvertibledebtiscontroversialbyignoringthecostofconversionprivilegeDilutedearningspershareusesnumberofsharesissuableineventofconversionofconvertibledebtFAFviewsinterestasaperiodcost—notcapitalizableChangesinacompanyborrowingrate,notexplainedbymarkettrends,revealschangesinrisk

InterestandTaxesIncomeTaxesSubstantialcostofbusinessImportanttoanalysisof financialstatementsAnalysisfocusonperiodicincometaxexpenseInterestandTaxesIncomeTaxAccountingIdentifytypesandamountsoftemporarydifferencesandthenatureandamountofeachtypeofoperatinglossandtaxcreditcarryforwardMeasuretotaldeferredtaxliabilityfortaxabletemporarydifferencesComputetotaldeferredtaxassetfordeductibletemporarydifferencesandoperatinglosscarryforwardsMeasuredeferredtaxassetsforeachtypeoftaxcreditcarryforwardReducedeferredtaxassetsbyavaluationallowanceInterestandTaxesPermanentIncomeTaxDifferencesPermanentdifferencesresultfromtaxregulationswhere:ItemsarenontaxableDeductionsarenotallowedSpecialdeductionsaregranted

Effectivetaxratecanvaryfromstatutoryratedueto:BasisofpropertydiffersforfinancialandtaxaccountingNonqualifiedandqualifiedstockoptionplansSpecialtaxprivilegesLowercorporateincometaxrateuptoacertainlevelTaxcreditsDifferenttaxratesonforeignincomeTaxexpenseincludesbothstateandlocalincometaxesTaxlosscarryforwardbenefitsInterestandTaxesTemporaryIncomeTaxDifferencesRevenueorgainrecognizedinfinancialreportingbutdeferredfortaxpurposesExpensesdeductedfortaxpurposesexceedtheseexpensesforfinancialreportingRevenueorgainrecognizedortaxbutdeferredforfinancialreportingExpensesdeductedforfinancialreportingexceedtheseexpensesfortax.

FinancialStatementIncomeGAAPGAAPGAAPGAAPTaxableIncome

InitialIncomeTax

Reportedon JournalEntries

BalanceSheet

Categoryof Income Tax IncomeTax DeferredTax

Transaction Statement Return Expense Accounts*1. Revenueorgain Earlier Later Debit Credit2. Expensesorloss Later Earlier Debit Credit3.R