Sustainable Income and Net Income

1139 Words Oct 22nd, 2012 5 Pages
Lupita Mora-Rubio Chapter 13 Questions September 10, 2012
#1 Sustainable income (SI): When companies look at present year net income to estimate future cash flows it must make sure it does not include “irregular items.” Irregular items can be losses, gains, revenues, or expenses. Net income (NI) adjusted for irregular item is SI. SI is the most likely level of income to be obtained in the future for the company. SI is different than NI as it does not include the irregular items in the actual year NI.
What relationship does this concept have to the treatment of irregular items on the income statements? SI is of value as it contains the NI without the “noise” of irregular items. Example of irregular item is a one in a lifetime
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On September 1 Gomez disposed of the Mexico facility at a pretax loss of $680,000. The applicable tax rate is 25%. Show the discontinued operations section of Gomez’s income statement.
Gomez Corporation
Income Statements
Discontinued operations: loss from discontinuation site in Mexico
$680,000 – 25% tax rate ($170,000) = ($510,000)
BE13-2 An inexperienced accountant for Osborn Corporation showed the following in
Osborn’s 2010 Income statement:
Income before income taxes $300,000
Income tax expense $72,000
Extraordinary loss from flood (before taxes) $60,000
Net income$168,000.
The extraordinary loss and taxable income are both subject to a 30% tax rate.
Prepare a corrected income statement beginning with “Income before income taxes.”
Income before income taxes $300,000
($300,000 – 30%)
Income tax expense $90,000
($300,000 - $90,000)
Income before irregular items $210,000

Extraordinary Item: net of $18,000 income tax savings
Extraordinary loss from flood (before taxes) $60,000
($60,000 - $18,000) ($42,000)
Net income $168,000

BE13-4 Using these data perform horizontal analysis
Patillo Company
Balance sheet
December 31 Increase (Decrease) During 2010 2010 2009 Amount Percent
Accounts receivable $ 560,000 $ 400,000 $160,000 40 (.4) (560000-400000/400000)
Inventory 780,000 650,000 130,000 20 (.2)
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