Most Companies Keep Separate Sets of Accounting Records for Financial

question 60

Multiple Choice

Most companies keep separate sets of accounting records for financial reporting and for income tax computations. Which of the following statements is true?

• A) They do it because the Income Tax Act requires companies to keep separate records for tax purposes.
• B) They do it even though this practice is illegal and in violation of international financial reporting standards.
• C) They do it to enable a company to do a reconciliation between taxable income and reported profit.
• D) They do it because financial reporting rules and ITA regulations differ in many ways.

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Definitions:

Claim Dilution

The reduction in the likelihood or potential value of a claim, which can happen when a company issues additional shares or when other circumstances decrease the value of existing claims.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquidity and operational efficiency of the business.

Lender's Risk

The risk faced by a lender that the borrower may not repay a loan either in part or in full.

Asset Substitution

A financial strategy where a firm replaces less risky assets with more risky investments, potentially increasing shareholders' wealth but also the risk to lenders.