intra-period tax allocation
the income tax effect of discontinued operations needs to be reported on the income statement separately from income taxes applicable to continuing operations, and discontinued operations are reported on the income statement net of their applicable taxes. therefore, taxes must be allocated on the income statement between income from continuing operations and income from discontinued operations. in addition, any items reported on the balance sheet in accumulated other comprehensive income are to be reported net of tax. allocation of tax among income from continuing operations, discontinued operations, and accumulated other comprehensive income is called intra-period tax allocation (allocation within one period).
the income tax due should be allocated first to income from continuing operations. the remaining tax due should be allocated to gains/losses from discontinued operations and items reported in accumulated other comprehensive income according to each one’s proportion of the total other taxable items. benefits of the income statement
the income statement helps to predict future cash flows, as follows:
it helps users to evaluate the company’s past performance and to compare it to the performance of its competitors.
it provides a basis for predicting future performance.
it helps users assess the risk or uncertainty of achieving future cash flows. limitations of the income statement
most of the limitations of the income statement are caused by the periodic nature of the income statement. at any particular financial statement date, buying and selling will be in process and some transactions will be incomplete. therefore, net income for a period necessarily involves estimates that affect the company’s performance for the period.
limitations that reduce the usefulness of the income statement for predicting amounts, timing, and uncertainty of cash flows include:
net income is an estimate that reflects a number of assumptions.
income numbers are affected by the accounting methods used. for example, differences in methods of depreciation can cause differences in the amount of depreciation expense during each year of an asset’s life. a lack of comparability between and among companies results from these differences in accounting methods.
income measurement requires judgment. for example, the amount of depreciation expense recognized during a period is dependent on estimates regarding the useful lives of the assets being depreciated.
items that cannot be measured reliably are not reported in the income statement. for instance, increases in value due to brand recognition, customer service, and product quality are not reflected in net income.
the income statement is limited to reporting events that produce reportable revenues and expenses. some transactions are not reported immediately on the income statement.