Profit before tax: economic sense and calculation methods.

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2018-03-18 10:21:12

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The Economic activity of any enterprise should be assessed in order to obtain a precise idea of how effectively the management of the company, what risks are there in front of her today and what are the prospects of its further development in the future. To do this, the analysis of many economic indicators, important among which is given to this, as the profit before tax.

In order to understand what the economic sense of this indicator, you must first understand what it consists of. The profit before tax consists of net profit adjusted for the following indicators, acting as a kind of amendment:

- the revenues or expenses associated with the operations of the company. This category includes the income and expenses occurring in the company, however, is not directly related to the sales of goods and services, that is its primary activity. These revenues and costs may occur in the provision of certain assets for rent payments for the use of intellectual property, dividends, bringing the ownership of company securities and so on.

- revenues or expenses, referred to as non-operating. These revenues and costs arise in the case of raschityvaya fines or penalties for breach of contracts, payment of penalties, receive any funds donated (according to the contract of donation), as well as the profits or losses of previous years identified by accounting only in the current year.

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Thus, the profit before tax determined by the formula:
PDO = PP +/- OD/R +/- VD/R.

In this formula, PDO – this is calculated us rate, ML/R – operating income or expenses, and VD/R – the income or expenses classified as non-operating.

As you can see, the profit before tax represents an intermediate figure between sales revenue and net profit. You have to understand that for economic analysis it is important not just the value of this indicator according to the principle of “more – so most certainly better”, and the important role played by the structure of the indicator. Since the profit before tax includes three main components, it is also important to determine the relationship between them. The higher the share of the profit from sales and the lower the share of the other components, the better and more efficiently-built enterprise management system, and Vice versa – the higher the proportion of random income and expenses, the worse the established mechanism of work of the company. The value of profit before tax can be very high, however, if the share of the profits from sales it is relatively small, this means that the firm only exists due to the random income, the flow of which may be terminated at any time. Thus, analyzing the structure of this indicator, it is possible to draw conclusions about the quality of functioning of system of management of the company.

As you can see, the profit before tax is an important indicator of the economic condition of the company. His analysis can say a lot about how to develop a company how effectively it is managed, and what are the future prospects of its development. This indicator is required to be included in the financial statements of the company and shown in the statement of financial performance and the report about losses and profits of the company. Correct calculation of this figure will help to inform contractors and potential investors about how effective their investments, how safe is this investment and how much profit they will receive in the future. After the calculated profit before tax from the start to be deducted the amount of all taxes which should pay enterprise, and thus calculate the net profit of the enterprise – its main financial results.


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Alin Trodden - author of the article, editor
"Hi, I'm Alin Trodden. I write texts, read books, and look for impressions. And I'm not bad at telling you about it. I am always happy to participate in interesting projects."

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