Deferred taxes refer to the non-cash expense that is used to cover unpaid tax liabilities (Kieso, Weygandt, & Warfield, 2010). Deferred taxes are basically the product of tax laws that permit companies to write off expenses more rapidly than they are recognized, consequently creating a differed tax liability (Kieso, Weygandt, & Warfield, 2010). The following is the methodology for the determination of deferred taxes: the first step is to find out the total tax amount a company owes based on its present annual net income. For a firm that pays an average annual tax of 33% and has a yearly net income of $1 million, the amount of taxes owed will be $1 million x 0.33 which is equal to $330,000. The next step is to determine the actual tax liability based on the tax law. Variations arising from accounting methods and tax laws can lead to a provisional difference between the actual tax liability due and tax amount payable. This difference is called the deferred tax. For example, a company’s annual tax payable is $200,000, therefore, the differed tax will be $330,000 – $200,000 = $130,000 (Kieso, Weygandt, & Warfield, 2010). This value is listed on the balance sheet as a deferred tax asset.
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The Procedures for Reporting Accounting Changes and Error Corrections
There are two procedures/approaches, namely retrospective and prospective. The retrospective approach is the most preferred method as it provides comparability and uniformity across various entities and between different periods (Kieso, Weygandt, & Warfield, 2010). Financial statements that are comparative are recast to reflect on the alterations. The change’s cumulative effect is reported as an adjustment in the preceding period, in the initial period report. The adjustment of the accounting records is done to reflect the cumulative effect from the start of the current period, after which the error is disclosed as a restatement (Kieso, Weygandt, & Warfield, 2010). The prospective approach, on the other hand, is used only when it is impossible to utilize the retrospective approach. Consider a change from inventory costing to LIFO. Under such circumstances, it is impossible to approximate the cost of goods sold, as well as the inventory in the previous years supposing an entity was using LIFO. FASB mandates the use of the prospective approach in certain situations especially when a new accounting standard is to be adopted. Examples of changes reported under prospective method include a change in depreciation or depletion method (Kieso, Weygandt, & Warfield, 2010).
The Rationale behind Establishing the Subsidiary as a Corporation
There are various reasons for establishing a subsidiary as a corporation such as protection from legal liabilities. In case, where a subsidiary has legal liabilities such as defamation claims, debts, or copyright infringement, it can decide to establish a corporation to protect its assets from being sold. The independence of a corporation prevents it from being held responsible for the debts of the subsidiary, thus insulating its assets. Establishing a subsidiary as a corporation also greatly increases its access to capital as there are no restrictions on the type of people who would want to invest in the company (Kieso, Weygandt, & Warfield, 2010). Investors are attracted to full corporations more in comparison to subsidiary companies.
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The Difference between a Review and an Audit
A review is concerned with a company’s growth and development while an audit is concerned about the company’s financial statement (Kieso, Weygandt, & Warfield, 2010). While an audit aims at providing an opinion with regard to the financial statement of an organization, a review assesses matters related to a company’s products and services such as their affordability, performance, efficacy, etc. (Kieso, Weygandt, & Warfield, 2010).
Internal Memorandum
To: The Accounting Manager
From: Shabnam Vahabi, CPA
Date: 06 February, 2012
Subject: My Professional Responsibilities as a CPA
This memo provides a summary of my professional responsibilities as the CPA of this company. I have numerous duties and responsibilities which range from conducting audits on the company accounts, managing the company’s finances, overseeing budgets making sure that financial records are maintained and audited, to checking for inconsistencies in the company’s revenues, investments and expenses. Other responsibilities include ensuring that financial records are accurate, compiling reports on financial statements, analyzing the company’s financial reports, carrying out tax returns, as well as providing financial advice to the company on best ways to save money.
