Question

foursquare technology corporation establish foreign operations in lithuania and taiwan in the current year corporate management has decided to evaluate the foreign operations and their managers on the basis of earnings before tax discuss the issues the foursquares corporate management should consider in determining exactly how its foreign operations earnings before tax will be measured for performance evaluation purposes

Answer 1

EARNINGS BEFORE TAXES :

It is the amount of earnings/ profits retained by the company before deducting any kind of taxes. It involves all the expenses to be deducted including interest and depreciation except the tax expenses.It is one of the important measure for the performance evaluation of a company. Few companies follow the performance evaluation through earnings before interest and taxes(EBIT) while few follow the method of earnings before taxes (EBT).

While determining the foreign operations earnings before taxes for the purpose of performance evaluation, the company need to collect the information regarding all the incomes earned in the form of sales, commission, rents, interest etc. Along with that, all kinds of expenses (including interest expense) needs to be accounted(deducted) for.These expenses may be the cost of goods sold,rent etc. All these expenses (except taxes) needs to be deducted from the total income to arrive at EARNINGS BEFORE TAXES.

EBT have a significant impact on the performance evaluation for the managers as well investment analysts as it provides them all the useful information which will help them judge the operating performance of the company from its foreign operations.

As the company is operating in Lithuania and Taiwan in the current year, it needs to know the operational efficiency of its foreign operations as well and thus earnings before taxes will guide the managers the exact idea of evaluating the foreign operations and operating results from those operations.