Free Case Study About Accounting Contingencies And Liabilities Case Study
The income statement is like an annual report of a company’s earnings minus all the expenses incurred in one year. This is what a company’s stakeholders often look for whenever they want to check the current financial condition of the company or even generate forecasts about the company’s future . Naturally, companies that have a consistently healthy income statement would have a brighter future compared to a company that does not.
The income and sales taxes are often listed under the liabilities or the expenses section of an income statement because most states have policies that require companies that sell products and services to consumers and customers to act on their behalf by collecting sales taxes from consumers . Therefore, in the case of Cooke, if one product costs $100, and the sales tax rate for the state is set to 7%, then they would have to collect $107 from their customers and then later on remit the 7% they collected to the state’s taxation department. Nonetheless the correct alternative would still be to recognize the entire amount of estimated sales tax payable including interest because every company that generates income from sales of products and or services must declare the entire amount of revenue generate from sales so that they can be taxed properly by the state’s tax governing body.
The effect of the tax amnesty on the company can be tremendous. Firstly, it enables the company to correct its past mistake of not paying taxes by starting to declare their real taxable earnings and pay without any legal consequences which would not normally be the case because usually, companies that do these without the tax amnesty program are charged with tax evasion, among other legal charges possible; and thirdly, it allows the company to have a fifty percent discount on all the taxes it failed to pay since it started its business operations. Of course, a $25,000 liability would appear on the financial statement for that year which would of course be deducted from the revenue in order to compute for the net income. Therefore, the net income for that year would be significantly lower. However, the benefits of the decision to start paying taxes religiously would still far outweigh its cons.
Alper, C., & Katz, M. (2014). Some Aspects of the New York City Retail Sales Tax. St. John's Law Review, 28.
Financial Accounting Foundation. (2015). Accounting Standards Codification. Financial Accounting Foundation.