Question

What are some of the reasons that the components of income tax expense should be disclosed and a reconciliation between the effective tax rate and the statutory tax rate be provided?

Short answer

Thestatutory tax rate is the type of income tax rate imposed on the total taxable income. The law imposes this rate on different tax brackets.

Step-by-step solution

Introduction

Organizations should disclose the amount of their total income tax expense in the financial market since it positively impacts the mindset of investors and the public. A contribution to the country or economic development is vital in attracting outsiders to invest more funds.

Reasons

1. To determine the earnings quality: Investors in the financial market (before investing their funds into the organization) assess the firm's quality, worth, and growth by reconciling the pretax financial income to the taxable income. The amount is studied thoroughly, and the effective tax rate is applied.

2. Secure future cash flows: Computing the deferred tax in advance by the organization and noticing its growth or decline rate helps the firm ascertain its future cash flows and the total amount of tax payable.