PRETAX INCOME VS NET INCOME

Pretax Income vs. Net Income

Pretax Income VS Net Income

Introduction

The purpose of this study is to expand the boundaries of the author's knowledge by exploring some relevant facts related to comparison of pretax income and net income as a predictor of company profitability. Financial statement is a statement that provides valuable source of information for business managers and all who work within the business, also for potential investors and their business. The financial assets of a business merely represent claims on real estate and also the financial asset play a very crucial role in developed economy. This includes an income statement a balance sheet and cash flow statements. They are usually compiled on a quarterly and annual basis. Therefore the general purpose of a financial statement is aimed to meet the need of a wide range of users.

In this paper, the author will compare pretax income with net income as a predictor of company profitability over time ignoring stock prices. The analysis will also include some implications of IFRS convergence on effective tax rates.

Pretax Income

Profit before tax (also: Earnings before taxes, pre-tax profit; English: earnings before taxes, EBT) is an economic indicator and is derived from the profit and loss account of a company. It is calculated as Operating income plus financial income and extraordinary items, or

Net income plus net tax expense. A distinction between tax law , commercial law ( HGB ) or by some other accounting procedures such as IFRS or U.S. GAAP been imputed profit and loss account. Depending on the method, the profit before tax for the same company for different levels, which complicates the comparison of different balance sheet of enterprises. The pre-tax profit is the basis for the determination of the tax payments of the company and reported in accordance with HGB tax burden, but not for the tax charge under international accounting standards.

Net Income

Income “is broadly speaking that what comes in” (Simons: The Definition of Income , 1938/1969, 64), incorporating monetary and/or natural income. Both kinds are key indicators for consumption patterns and thus for consumer culture. Monetary income can be generated from land, produced goods and services, and consumers' capital, and gained from trading profit. The following dimensions are important determinants of income: income type—gross versus net; the entity—varying from a rather macroeconomic (countries, population groups) to a microeconomic level (households, individuals); the timeframe—on a daily, weekly, monthly, or annual basis or regarding individuals' long-term income or life cycle view.Income is a key determinant of individual and household consumption patterns. For an individual, the income is the sum of all wages, salaries, interest rates, profits, payments, rents, transfers, and other received earnings. A widely used concept for comparing individuals' or households' welfare is disposable income that consists of earnings, self-employment and capital income and public cash transfers, from which income taxes and social security contributions paid by households are deducted. Comparing households' welfare calls for a definition of the term household ...