calculate the representative net income for 2015 In examining the income statement in Figure 1, note that

calculate the representative net income for 2015 

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In examining the income statement in Figure 1, note that there was an extraordinary loss of $170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percent for * the year.* $170,000 Extraordinary loss .65 (1-tax rate) $110,500 Aftertax addition to profits from eliminating the extraordinary loss from net income The more representative net income number for 2015 would now be: Initially reported (Figure 1) Adjustment for eliminated Adjusted net income $200,318 extraordinary loss being +110,500 $310,818 In examining the income statement in Figure 1, note that there was an extraordinary loss of $170,000 in 2015. This might have represented uninsured losses from a fire, a lawsuit settlement, etc. It probably does not represent a recurring event or affect the earnings capability of the firm. For that reason, the astute financial analyst might add back in the extraordinary loss to gauge the true operating earnings of the firm. Since it was a tax-deductible item, we must first multiply by (1-tax rate) before adding it back in.* The tax rate was 35 percent for * the year.* $170,000 Extraordinary loss .65 (1-tax rate) $110,500 Aftertax addition to profits from eliminating the extraordinary loss from net income The more representative net income number for 2015 would now be: Initially reported (Figure 1) Adjustment for eliminated Adjusted net income $200,318 extraordinary loss being +110,500 $310,818

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You are right The extraordinary loss of 170000 in 2015 likely does not represent the fir... View the full answer