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Earnings and Profits - Computation and Corporation

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I have answered the following questions; however, I wanted to see what your responses would be.

What are earnings and profits? How and why are they computed? What difference do earnings and profits make to a corporation? To the stockholders of a corporation?

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Solution Summary

This solution explains earnings and profits, including how and why they're computed. This solution also includes a detailed discussion of the difference earnings and profits make to a corporation and to the stockholders of a corporation.

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Earnings and profits are economic income -- income that the company has available for shareholders in an amount that would not affect working capital. When a company calculates earnings and profits, they do so by the following: taxable income + any additions/adjustments to taxable income - subtractions from taxable income - accounting adjustments for year-end = earnings and profits. The end result is the amount of current earnings and profits. It is the total net profit after including adjustments and subtracting the appropriate amount of distributions - basically, it's what's left over. ...

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