Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Which of the following is subtracted from taxable income when computing current earnings and profits (E&P)?

Tax-exempt interest income

Life insurance proceeds on key employees

Dividends received deduction

Federal income taxes paid

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Verified step by step guidance

Understand the concept of Earnings and Profits (E&P): E&P is a measure used in tax accounting to determine a corporation's ability to pay dividends to its shareholders. It is calculated by adjusting taxable income for certain items, both additions and subtractions.

Identify the items that are subtracted from taxable income when computing current E&P: Federal income taxes paid are subtracted because they represent an expense that reduces the corporation's ability to distribute earnings as dividends.

Clarify why the other items listed are not subtracted: Tax-exempt interest income and life insurance proceeds on key employees are typically added back to taxable income when computing E&P because they increase the corporation's ability to pay dividends. The dividends received deduction is also not subtracted; it is an adjustment to taxable income for tax purposes but does not directly affect E&P.

Recognize the importance of federal income taxes paid in the calculation: Federal income taxes paid are a direct cash outflow that reduces the corporation's available earnings, making them a subtraction in the E&P calculation.

Apply this understanding to similar problems: When computing E&P, always analyze whether an item increases or decreases the corporation's ability to pay dividends, and adjust taxable income accordingly.