Chapter 14 Notes - Income Taxes, Unusual Income Items, and Investments in Stocks

Taxes are a large part of businesses expenses, all corporations are required to pay a federal tax and also a list of other taxes such as local and state tax. Taxes are approximately 30 to 40 % of the earnings of the year and are labeled on the income statement as Income Tax Expense. Taxes are tallied at the bottom of the income statement to calculate net income.

Taxable income- is determined according to the tax laws and is reported to taxing authorites on the corporations tax return. It is often different from the income before income taxes reported in the income statement according generally accepted accounting principles.
*income tax based on taxable income usually differs from  income tax based on income before taxes.

temporary differences- are differences that reverse or turn around in later years.
differences in taxable income and income before taxes are taxable income is recognized in one period for tax purposes and income before taxes are recognized for income statement purposes.

*Revenues or gains are taxed after hey are reported in the income statement.
*Expenses or losses are deducted in determining taxable income after they are reported in the income statement.
*Revenues or gains are taxed before they are reported in the income statement
*Expenses or losses are deducted in determining taxable income before they are reported in the income statement.

Since temporary differences change or reverse in later years, they do not change or reduce the total amount of taxable income over the life of the business. It only effects the timing in which the revenues and expenses are recognized fro tax purposes.

*Deferred income tax payable is reported as a liablility at the end of the year.

Permanent Differences- Are differences which will not reverse with the passage of time.
examples include interest income and municipal bonds which are not exempt from taxation

Reporting Unusual Items on the Income Statement

Unusal items are required to be reported seperately on the current year or pervious periods income statement depending on when they occured.

Unusual Items that affect the current period income statement include...
-Fixed asset impairments
-Restructured charges
-Discounted operations
-Extraordinary items

Unsusual Items that affect the previous periods income statement include...
-Errors
-Change in Accounting principles

Fixed asset impairments and restructured charges are sutracted from gross profit on the income statement from continuing operations
Discounted operations and extraordinary items are listed below continuing operations on the income statement to help determine net income for the period.

Fixed Asset Impairments- occur when the fair value of a fixed asset falls below its book value and is not expected to recover.
Examples for this occuring include
-decreases in the market price of fixed assets
-significant changes in the business or regulations related to fixed assets
-adverse conditions affecting the use of fixed assets
-expected chas flow losses from using fixed assets

the loss on fixed asset impairment is reported as a seperate entry to expenses in the journal. Loss on fixed asset impairment is debited and equipment is credited.

Restructuring Charges- are costs incurred with actions such as canceling contracts, laying off or relocating employees and combining operations.

Restructuring charges are reported as a seperate expense which is deducted from gross profit to determine income for continuing operations. In the journal restructuring charges is debited and employee termination obligation is credited.

Discounted Operations- is a gain or loss from disposing of a business segment or component of an entity. The term business entity refers to a major line of business for a company, such as division department, or certain class of customer.

Extraordinary Items- result from events and transactions that
-are significantly different from normal operating activities
-occur infequently

Natual Disasters, condemning land or buildings, and other disposing of a business segment should be reported as an extraordinary item.

Unusual items affecting the prior periods income statement
- errors in the recognition, measurement, presentation or disclosure of financial statements
- changes from one generally accepted accounting principle to another generally accepted accounting principle

in addition to these two unusual items affecting the income statement they also require a retroactive restatement of prior period earnings.

Theses errors or changes in accounting principles found must be corrected in the previous statements and should be applied to future statements. So both these unusual items  do not affect the current periods statements only pervious ones.

Earnings per common share

It is hard to determine how profitable different size companies are based soley on net income so to easily compare comanies, businesses use what is called earnings per common share.