Intraperiod Tax Allocation

Generally, the income statement will be divided into several sections, thereby allowing the analyst to understand income generated from continuing operations versus the impact of irregular items. If they apply, the income statement will include line items for the following:

• Income (or Loss) from Continuing Operations

• Discontinued Operations

• Extraordinary Items

• Prior Period Adjustments

• Changes in Accounting Principles

Each of the above items will likely provide the company with an additional tax liability or benefit. To allow the reader of the income statement to better understand the company's ability to generate net income from continuing operations, an intraperiod tax allocation is performed. This means the above items are shown net of taxes, or the income tax benefit or expense is shown immediately below.

As the name implies, the allocation occurs within the current accounting period. This process is straightforward and less controversial than an interperiod allocation, which apportions income taxes between accounting periods.

Company A changed their depreciation method from declining balance to straight line. The cumulative effect of this change was an increase to net income of $50,000 on a before tax basis, and an increase to income taxes of $20,000. Before this change, Company A's financial statement indicated net income of $2,500,000. The impact of this change on Company A's income statement would be:

Note: Cumulative effects of a change in accounting methods would appear in the income statement after any extraordinary items.