In January, DropoutEdu sold and delivered $100 worth of textbooks to customers. But, the customers only need to pay cash for the purchase in February. Assuming a 25% tax rate, how much would DropoutEdu report in earnings in January?
Answer: 75
Cash is irrelevant to income statement earnings.
First, the goods were transferred in January, so it aligns with the reporting period (January) on the statement. Second, revenue affects earnings to common shareholders. So, this transaction will show up on the income statement.
Revenue is up by $100 because DropoutEdu provided the goods. Pre-tax income is up by $100. Taxes are $25 (25% x $100). So, net income is $75 ($100 – $25).
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