Question

The fact that the accounting method the taxpayer uses to measure income is consistent with GAAP does not assure that the method will be acceptable for tax purposes.

a. True
b. False

Answer 1

The statement is true; adherence to GAAP does not ensure acceptability of an accounting method for tax purposes. GAAP serves financial reporting, whereas tax accounting follows the guidelines of the Internal Revenue Code, leading to potential differences in income and expenses recognition.

Step-by-step explanation:

The statement that the consistency of a taxpayer's accounting method with GAAP (Generally Accepted Accounting Principles) does not ensure that the method will be acceptable for tax purposes is true. GAAP is designed primarily for financial reporting, which aims to give a fair and consistent representation of a company's financial performance and position to its stakeholders. In contrast, tax accounting is governed by the Internal Revenue Code (IRC) in the United States, which has different objectives, namely the collection of taxes by the government.

While there are areas where GAAP and tax accounting overlap, there are significant differences. For instance, the timing of income recognition can differ, as can the treatment of expenses. Therefore, a method that adheres to GAAP might not necessarily comply with tax accounting rules, which could lead to different figures being reported for financial and tax purposes.