Banks Corp reported net income of $595,000 in 2012 . During 2012 Banks reported a loss of $87,435 from a peripheral activity. The loss was included as part of income from continuing operations. Assuming that the loss is a one-time event and that Banks
has an effective tax rate of 35% calculate Banks' adjusted net income. Show all of your calculations for credit. In addition, discuss why analysts might make an adjustment of this type.
Banks' income statement:
Adjusted
As Reported Totals
Income before tax (X - .35X=$595,000) $915,385 $1,002,820
Income tax expense (35%) (320,385) (350,987)
Net Income $595,000 $651,833
The analyst may decide to adjust income totals because the gains or losses do not relate to the sale of the company's principal products and services. Normally, only gains and losses from the sale of principal products and services should enter the forecasts of future earnings and profitability.
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