Financial Accounting and Reporting-CPA Practice Exam

GAAP income tax expense is defined as what?

1. The sum of deferred income tax assets only

2. The total of current income tax expense and deferred income tax expense

3. The average tax rate applied to net income

4. The payment made to the IRS during the year

The correct answer is: The total of current income tax expense and deferred income tax expense

GAAP income tax expense is defined as the total of current income tax expense and deferred income tax expense. This definition captures the full spectrum of tax obligations that a company incurs during a fiscal period. Current income tax expense refers to the taxes a company expects to pay based on its taxable income for the current period, while deferred income tax expense represents the taxes that are anticipated to be paid in future periods due to temporary differences between accounting income and taxable income. These temporary differences can arise from various sources, including differing methods of reporting revenues and expenses for financial and tax reporting purposes. By combining both current and deferred income tax expenses, the resulting figure reflects the comprehensive tax expense recognized in the financial statements under generally accepted accounting principles (GAAP). This approach ensures that financial statements accurately represent the impact of taxation on a company's financial performance, providing stakeholders with a clearer understanding of the overall tax liabilities associated with the company's earnings. The other options do not encompass the complete picture of tax expenses as recognized under GAAP, as they either focus on only one aspect of tax liabilities or misrepresent how the tax expense is calculated.