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 