Areas of an Income Statement, Part 3

While some other lines of an income statement depend on estimates or forecasts, the interest expense lines are a basic equation. When pertaining to income tax expense, however, a company 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 utilized in the tax return is calculated. Then the tax based on this hypothetical taxable earnings are fitured. This is the income tax expense reported within the income statement. This amount is reconciled with the actual amount of income tax owed created according to the accounting methods used for income tax purposes. A reconciliation of the two different income tax amounts is then provided in the footnote on the income statement.

Net gain is like earnings before interest and tax (EBIT) and can vary considerably according to which accounting methods are widely used to report sales revenue and expenses. This is where profit smoothing comes into play to manipulate earnings. Profit smoothing crosses the race from choosing acceptable accounting methods further from list of GAAP and implementing these techniques in a reasonable manner, into the gray area of earnings management that involves accounting manipulation.

It's incumbent on managers and companies 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 fiscal reports more often than not. It's therefore critical that any officer or manager in a company be thoroughly knowledgeable about how the company's fiscal reports 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.