Final answer:
Misstatement of Earnings Before Interest and Taxes (EBIT) directly affects the pretax income, leading to either overestimation or underestimation of income and tax liabilities.
Step-by-step explanation:
When earnings before interest and taxes (EBIT) is misstated, the pretax income is consequently misstated. Given that we are ignoring the standard deduction and exemption, we are assuming that taxes are calculated from the very first dollar of income. Therefore, any misstatement in EBIT will directly affect the amount of income reported before taxes. If EBIT is overstated, pretax income will also be overstated, leading to an overestimation of income and the associated taxes. Conversely, if EBIT is understated, pretax income will be understated, resulting in lower reported earnings and potentially lower tax liabilities. It is crucial for the accuracy of financial statements and tax calculations that EBIT is reported correctly.