30 June 2022

Parts of an Income Statement, Part 3

While some lines of an earnings declaration depend upon quotes or projections, the interest expense line is a standard formula. When accounting for income tax expenditure, however, a business can use different accounting methods for some of its expenditures than it utilizes for determining its taxable income. The theoretical quantity of gross income, if the accounting methods used were used in the tax return is calculated. Then the income tax based on this theoretical taxable earnings is fitured. This is the earnings tax expense reported in the income declaration. This quantity is fixed up with the real amount of income tax owed based upon the accounting techniques used for income tax purposes. A reconciliation of the 2 various earnings tax amounts is then provided in a footnote on the earnings statement.

Earnings resembles revenues prior to interest and tax (EBIT) and can vary significantly depending upon which accounting techniques are utilized to report sales profits and expenditures. This is where earnings smoothing can enter play to manipulate earnings. Profit smoothing crosses the line from picking acceptable accounting approaches from the list of GAAP and executing these methods in a sensible manner, into the gray location of profits management that includes accounting control.

It’s incumbent on managers and entrepreneur to be associated with the decisions about which accounting methods are utilized to measure profit and how those techniques are in fact carried out. A manager can be requires to address questions about the company’s financial reports on many occasions. It’s therefore vital that any officer or manager in a business be completely familiar with how the company’s financial statements are prepared. Accounting methods and how they’re carried out vary from company to company. A company’s techniques can fall anywhere on a continuum that’s either left or right of center of GAAP.

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