Learn Valuable Parts of an Income Statement

While some lines of an income statement depend on estimates or forecasts, the interest

expense line is a basic equation. When accounting for income tax expense, however, a

business can use different accounting methods for some of its expenses than it uses for

calculating its taxable income. The hypothetical amount of taxable income, if the

accounting methods used were used in the tax return is calculated. Then the income tax

based on this hypothetical taxable income is fitured. This is the income tax expense

reported in the income statement. This amount is reconciled with the actual amount of

income tax owed based on the accounting methods used for income tax purposes. A

reconciliation of the two different income tax amounts is then provided in a footnote on

the income statement.

Net income is like earnings before interest and tax (EBIT) and can vary considerably

depending on which accounting methods are used to report sales revenue and expenses. This

is where profit smoothing can come into play to manipulate earnings. Profit smoothing

crosses the line from choosing acceptable accounting methods from the list of GAAP and

implementing these methods in a reasonable manner, into the gray area of earnings

management that involves accounting manipulation.

It's incumbent on managers and business owners to be involved in the decisions about which

accounting methods are used to measure profit and how those methods are actually

implemented. A manager can be requires to answer questions about the company's financial

reports on many occasions. It's therefore critical that any officer or manager in a company

be thoroughly familiar with how the company's financial statements are prepared. Accounting

methods and how they're implemented vary from business to business. A company's methods can

fall anywhere on a continuum that's either left or right of center of GAAP.