Question

Suppose two firms have identical sales, operating costs, employee competence, assets, and financing policies. These firms would have to report the same amount of profits, and their ratios would all be the same, provided they both followed generally accepted accounting principles in their financial reporting. True or false

Answer 1

Answer:

False.

Explanation:

Profit can be defined as the financial benefit received by a business organization when the total revenue exceeds the total costs. Revenues are as result of the sales while the total costs include; costs of running the business, expenditures and taxes. Profit can be calculated using the formula below;

P=R-C

where;

P=profits

R=total revenue

C=total costs

This can also be expressed as;

Profits=Total revenue-total costs.

In the case above, even if the two firms have identical sales, operating costs, employee competence, assets, and financing policies, they don't have identical tax liability. Tax liability can be defined as the amount of tax that is owed to an authority usually the government. Firms usually differ in the amount of tax they are to pay with regard to numerous factors. One factor is that whether the firm is registered as an S corporation or not. An S corporation is a company that does not pay corporate tax. The taxes in an S corporation are filed on individual incomes thus avoiding double taxation.