In the question4 of #34 in Schweser, it gives the tax rate problem.
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Profit before tax 1,480
Effective Tax Rate 28%
Statutory ta rate 35%
And, this year they have 25% reduction in the amount of taxed charged and increase by the same amount in the following period…
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So I can understand the 25% is something like deffered to the next year, thats fine, but when it calculates the this year’s tax amount, it uses Effective tax, not Statutory. why is it so?
In my understanding, Statutory should be used when you calculate the tax first, and some adjust added after that, then you can see how much tax actually paid. And finally comparing the amount you actually paid and EBT, you can decide the effective.
I’d appreciate you correct my understanding… thanks in advance.
The statutory tax rate is multiplied by the taxable income (on the tax return) to arrive at taxes owed.
The effective tax rate is defined as tax expense divided by profit before tax; by definition, you multiply profit before tax by the effective tax rate to get tax expense.
Taxable income (from the rax return) and profit before taxes (EBT, from the income statement) aren’t necessarily the same. The amount of tax paid (or payable, from the tax return) is not necessarily the same as tax expense (from the income statement). The effective tax rate uses tax expense (not taxes paid or payable) and EBT (not taxable income).