Five Keys to Accounting Doug Shackelford University of North Carolina #1 The Accountants’ Joke Q: What is 2+2? A: What you want it to be? The joke is right, But not for the reason you think! #2 Accountants and Empirical Researchers Assume Observe Measure Estimate Judge Record Audit/Replicate/Challenge #3 Accountants Measure Balance Sheets Assets = Liabilities + Equity Income is the Difference Tax Starts with that Difference (Income) and makes adjustments Tax Balance Sheets the missing statements Balance Sheets vs Tax Returns Source of Confusion GAAP measures A, L, and E Tax takes (unimportant) Changes to get Taxable Income Example: Accounting for Income Taxes GAAP trying to measure Deferred Tax ASSETS and LIABILITIES Key reason book tax provision isn’t taxes paid Why M-3 requires B/S Understanding #4 Language Matters Book Tax Expenses (Provision) Earnings Retained Earnings Book Value Goodwill LIFO Deductions Income Earnings and Profits (sort of) Basis Goodwill LIFO #5 Why Book-Tax Conformity Is a Misguided Idea Demand for accounting: Reduce asymmetric information by constructing balance sheets in a reliable and relevant manner using judgment Demand for tax: Collect revenue with as little judgment as possible Conformity is a naïve notion based on a failure to appreciate the role of accounting