Financial Management: Principles and Applications, 13/e

3.3 Corporate Taxes

In our discussion of the income statement, we simply listed the firm’s income tax obligation without further explanation. It is important that the financial manager understand how taxes are computed, as taxes are a critical factor in determining cash flow ( Principle 3: Cash Flows Are the Source of Value) and, consequently, in making many financial decisions. The tax rules can be extremely complex, requiring specialized expertise to understand them, so for our purposes we will provide a simplified overview of how corporate income taxes are computed.

Computing Taxable Income

A corporation’s taxable income is often referred to ...