Final answer:
To calculate the amount Grant should include in its year 1 income statement as a result before income taxes, one must identify the total revenue, subtract all business expenses to get gross profit, and then make adjustments for any deductions applicable. If deductions and exemptions are ignored, the net amount after expenses is the income before taxes.
Step-by-step explanation:
The question relates to determining the correct amount to include in the income statement for a year before the calculation of income taxes. The basic concepts of taxation help us understand that the taxable income is calculated by subtracting deductions and exemptions from the adjusted gross income.
Here is a step-by-step approach to answer the student's question:
- Identify the total revenue or income the company has generated within the year.
- Subtract all relevant business expenses such as costs for labor, materials, and capital from the total revenue to calculate the gross profit.
- Further subtract any business tax deductions that are applicable to arrive at the adjusted gross income.
- If there are any standard deductions or exemptions to be considered, subtract them from the adjusted gross income. However, the question specifies we should ignore standard deductions and exemptions, implying that the first dollar is taxed.
- The remaining figure after these subtractions is the amount that should be reported as income before income taxes on the income statement.
For example, if Grant had sales revenue of $1 million and the expenses totaled $950,000 including labor, capital, and materials, then the accounting profit (income before income taxes) would be $1 million - $950,000 = $50,000, which should be reported on the income statement.
Taxable income, adjusted gross income, and deductions and exemptions are critical components of understanding the calculation of income before taxes on an income statement.