Lecture 5
c) Purchases (expenses):
When reviewing purchased items, the following provisions of tax law should be
applied:
Recorded purchases should concern the financial (fiscal) year of the tax return not
any other year.
Purchases should be recorded by its cost not selling price.
Purchases shouldn’t include any purchases of fixed assets, as they are recorded in
the balance sheet.
d) Purchase returns and allowances (revenues):
When reviewing purchases returns and allowances item, the following provisions
of tax law should be applied:
Recorded purchase returns and allowances should concern the financial (fiscal) year
of the tax return not any other year.
Purchase returns and allowances should be recorded by its cost not by its selling
price.
Purchase returns and allowances should be recorded by its actual amounts.
Problem (5):
ABC is a merchandising firm that reported Net Income of L.E 100,000 for the year
ended December 31, 2022, and on the tax inspection of the company, the
following has been noted:
– Recorded purchases amounting to L.E 30,000 concerning year 2021.
– Unrecorded purchases amounting to L.E 25,000 of year 2022.
– Recorded purchase returns and allowances of L.E 5,000 concerning year 2021.
– Recorded office furniture purchases amounting to L.E 80,000.
– Recorded purchase returns and allowances of amount L.E 3,000 of year 2022.
Required: Determine the taxable net profit for year 2022 in accordance to taw
provisions of law 91/2005.
Tax return for year 2022
Deduction Addition Items
100000 Accounting net income ANP (as stated in the income
statement)
Adjustments:
30000 [Link] of year 2021 shouldn’t be recorded
25000 [Link] of year 2022 should be recorded
5000 [Link] returns and allowances of year 2021
shouldn’t be recorded
80000 [Link] shouldn’t include any purchases of fixed
assets, as they are recorded in the balance sheet not in
the income statement
- - [Link] returns and allowances of year 2022
should be recorded (no adjustment)
30000 210000 Total
(30000)
180000 Taxable Net Profit (TNP)
d) Ending inventory (revenues):
Ending inventory is the unsold items in the company’s warehouse till the end of the
preparation of the financial statements.
When reviewing ending inventory, the following provisions of tax law should be
applied:
– Ending inventory should be recorded by cost not by selling price.
– Ending inventory should include all the products listed on the physical count
process and all the products that the firm has purchased and not yet
received (delivered) as the ownership belongs to the firm.
All the products that the firm doesn’t own (that was sold) shouldn’t be included in
ending inventory as it doesn’t belong to the company anymore.
The firm should follow the same valuation (pricing) policies of ending inventory from
one year to another, and not undervalue or overvalue the ending inventory from
one year to another. These valuation policies can be:
1. Cost method
2. Market value method
3. Cost or market value which is less method
Problem (6):
The accounting net income of XYZ merchandising company for the year ending
December 31, 2022 amounted to L.E 300,000. On the tax inspection of the
company, the following has been noted:
1. The firm contracted on purchasing products amounting to L.E 50,000 and it is
recorded in the accounts and records as purchases but it is not yet received at
the company’s warehouse, therefore it has not been included in the physical
count lists.
2. The company is following the cost method in the valuation of the ending
inventory. However, as a result of a decrease of L.E 30,000 in the market price for
some items included in the ending inventory, the value of these items were
included in the ending inventory balance by the market price.
3. The firm contracted on selling products amounting to L.E 72,000 and has been
recorded in the books as a selling transaction but it is not yet delivered to
customers. As a result, it has been included in the physical count with the cost,
noting that the selling prices are being determined by cost plus 20% of it’s profit
margin.
Required: illustrate the effect of the previous transactions on the accounting net
profit of year 2022.
Tax return for year 2022
Deduction Addition Items
300000 Accounting net income ANP (as stated in the income
statement)
Adjustments:
50000 [Link] inventory should include all the products listed
on the physical count process and all the products that
the firm has purchased and not yet received (delivered)
as it is now owned by the firm
30000 [Link] firm should follow the same valuation (pricing)
policies of ending inventory from one year to another,
and not undervalue or overvalue the ending inventory
from one year to another
Undervalue = 30000
60000 3. All the products that the firm doesn’t own (sold)
should not be included in the ending inventory
because it no longer belongs to the company. It should
be excluded by its cost not selling price
Selling price = Cost + profit margin (% of cost)
72000 = Cost + 20% cost
72000 = 120% cost
72000 ÷ 120% = Cost
60000 = Cost
60000 380000 Total
(60000)
320000 Taxable Net Profit (TNP)
Remark (1): Withdrawals (revenues):
Withdrawals by the owner (partner) himself or one of his family members in the form
of goods and products are recorded by its selling price, and not according to its
cost.
Remark (2): Sales of remnants and residues (revenues):
Sales of remnants concerning the financial (fiscal) year of the tax return is recorded as
sales.
Remark (3): Transportation In & Out Costs (expenses):
Transportation In & Out Costs concerning the financial (fiscal) year of the tax return is
:recorded under the following conditions
- When these costs are supported by documents.
- When there is an agreement between the firm and the other party that states that
the firm should pay for these costs.
Remark (4): Agreements:
Any sales or purchases agreements should not be recorded in the tax return as they
are not considered to be actual operations. Thus, if recorded they should be
excluded.
Please always remember that:
Expenses Revenues
Sales returns and allowances Sales
Sales commission
Beginning inventory Ending inventory
Purchases Purchases returns and allowances
Transportation in & out costs Withdrawals
Sales of remnants
Purchase agreement Sales agreement