Permanent differences affect current and deferred balances; temporary differences only affect tax expense.

Question

Options

• ATrue
• BFalse

• A
  28% (16)
• B
  72% (42)

Explanation

B is correct because the statement reverses the actual relationship between these two types of differences. It is temporary differences - not permanent ones - that create deferred tax assets and liabilities, because they will reverse in future periods and affect future taxable income. Permanent differences (e.g., tax-exempt interest, non-deductible fines) never reverse, so they only affect the current period's tax expense and never give rise to deferred balances.

Why A is wrong: Accepting the statement as true would mean misapplying deferred tax accounting entirely - booking deferred balances for items that will never reverse, while ignoring deferred effects for items that will.

Memory tip: Think "temporary = timing = deferred." Temporary differences are timing mismatches between book and tax income - because the mismatch resolves later, it creates a deferred balance today. Permanent differences are permanent precisely because there's nothing to defer; they hit tax expense once and disappear.

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