Frederickson Office Supplies recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,250 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was the firm's taxable income, or earnings before taxes (EBT) ?

EBT = $3400

Explanation:

Income Statement

$

Sales Revenue 12,500

Operating costs (7,250)

Operating profit (EBDIT) * 5,250

Depreciation Expense (1,250)

EBIT* * 4,000

Finance cost (7.5%) (600)

EBT 3,400

*EBDIT-Earnings Before Depreciation, Interest and Tax

**EBIT-Earnings Before Interest and Tax

EBT represents earnings available from which distribution to tax authority can be made and dividends can also be paid-out to shareholders and the balance can then be retained for future business investment and expansion.

As a financial measure, it can be used to set target and measure performance of different divisional managers. This is possible because they have control over theit performance unlike when tax has been adjusted for which is not within their control. However, each divisional manager must be responsible for its financing decision before they can be held responsible for their performane on basis of EBT

EBT 3,400

Explanation:

Earnings before Taxes (EBT)

sales revenue 12,500

operating cost (7,250)

EBDIT 5,250

(earnings before depreciation, interest and taxes)

Depreciation (1,250)

Interest

debt x cost of debt

8,000 x 7.5% = (600)

EBT 3,400

This will be the taxable income from which the income tax will be calculated.