Question

All temporary differences are categorized in which of the following ways? (Select all that apply.)

A) Future deductible amounts
B) Future taxable amounts
C) Past taxable amounts
D) Past income amounts

Answer 1

Temporary differences are categorized as either Future deductible amounts or Future taxable amounts options (a,b), referring to transactions affecting future tax bills due to differences in financial vs. tax reporting.

Step-by-step explanation:

All temporary differences that arise between tax accounting and financial accounting can be categorized as either Future deductible amounts (A) or Future taxable amounts (B). These differences occur because certain items are recognized in different periods for financial reporting purposes versus tax reporting purposes.

For instance, a revenue might be reported on financial statements in one year but taxed in a different year, or a business might be able to take a tax deduction for an expense before it is recognized as an expense in the financial statements.

Future deductible amounts will eventually decrease taxable income in the future, whereas future taxable amounts will increase taxable income in the future.

There are no categories for past taxable amounts (C) or past income amounts (D), as temporary differences are concerned with future tax implications of transactions that have already been accounted for in the financial statements.