The Portable MBA in Finance and Accounting, 3rd Edition

74 Understanding the Numbers

3. When all pretax nonrecurring expenses and losses have been recorded,
   subtotals should be computed. These subtotals are then multiplied times 1
   minus a representative combined federal, state, and foreign income-tax
   rate. This puts these items on an after-tax basis so that they are stated on
   the same basis as net income or net loss.


4. The results from step 3 should be recorded on the line titled “tax-adjusted
   additions.”


5. All after-tax nonrecurring expenses or losses are next added separately.
   These items are either tax items or special income-statement items that
   are disclosed on an after-tax basis under GAAP, such as discontinued op-
   erations, extraordinary items, or the cumulative effect of accounting
   changes. The effects of LIFO liquidations are sometimes presented pre-
   tax and sometimes after-tax. Note that a line item is provided for the ef-
   fect of LIFO liquidations in both the pretax and after-tax additions
   section of the worksheet.

EXHIBIT 2.26 (Continued)

Year Year Year

Gains on patent infringement suits
Temporary expense decreases
Temporary revenue increases
Reversals of bad-debt allowances
Other
Other
Other
Subtotal

Multiply by

Times (1-combined federal, state tax rate)

Tax-adjusted deductions
After-tax LIFO liquidation gains
Reductions in deferred tax valuation allowances
Loss carryforward benefits from prior years
Other nonrecurring tax benefits
Gains on discontinued operations
Extraordinary gains
Gains/cumulative-effect accounting changes
Other
Other
Other

Subtotal

Total deductions

Sustainable earnings base