Business Degree Certification Practice Test

Which item should be shown net of tax on a corporation's income statement?

1. Operating income

2. Gross profit

3. Gain on sale of delivery truck

4. Discontinued operations

The correct answer is: Discontinued operations

Discontinued operations should be presented net of tax on a corporation's income statement because they represent components of a company's operations that have been eliminated and whose income results will not be continuing in future periods. The net effect of the tax on these operations is shown to provide a clearer picture of the actual financial impact on the company resulting from the discontinuation. This approach aligns with accounting standards that require the separation of continuing and discontinued operations to provide investors and stakeholders with insights into the ongoing profitability of the business, free from the influence of segments that are no longer part of the company. Presenting discontinued operations net of tax allows for a more accurate assessment of the company’s performance and future outlook. In contrast, other items, such as operating income and gross profit, reflect ongoing business activities and are reported on a pre-tax basis as they pertain to current operations. Gains on the sale of assets, like a delivery truck, are also typically presented without a net tax consideration until officially recognized for tax purposes. Thus, these components do not require the same net-of-tax presentation as discontinued operations do.