It Is Important to Distinguish Between Temporary and Permanent Book-Tax

question 98

Multiple Choice

It is important to distinguish between temporary and permanent book-tax differences for which of the following reasons?

• A)Temporary book-tax differences affect the computation of taxable income whereas permanent differences do not.
• B)All corporations are required to disclose book-tax differences as permanent or temporary on their tax returns.
• C)Temporary book-tax differences will reverse in future years whereas permanent differences will not.
• D)Neither temporary nor permanent book-tax differences will reverse in future years.

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Definitions:

Retained Earnings

Retained earnings are the portion of a company's profits that are kept or retained rather than being paid out as dividends to shareholders, used for reinvestment in the business, debt reduction, or other purposes.

Cost of Equity

The return that investors expect for investing in a company's equity, often calculated using models such as the Capital Asset Pricing Model (CAPM).

Floatation Costs

Expenses incurred by a company in issuing new securities, including underwriting fees, legal fees, and registration fees.

Tax Effect

The impact of taxation on business and investment decisions, including the influence of taxes on cash flows, investment returns, and financial planning.