A Study of Pretax Target Profit

Abstract

The target profit is the profit which management wants to earn for a particular future period of time. Setting this profit is an important process in profit planning. The method that includes the items of the appropriation of surplus (i.e., dividends, officer's bonuses, and legal reserve) and corporate income taxes is one of the useful methods of setting the target profit. This is valuable in the sense that it is the only method focusing on future surplus appropriations. However, the traditional method does not consider the relationship among the items of the appropriation of surplus or between the items of the appropriation and corporate income taxes. This study will : (1) Discuss the relationship among the items of appropriation and their relationship to corporate income taxes to derive the pretax target profit functions ; and (2) Propose a method of setting the pretax target profit that includes the relationship among them (see (1)). We can find that, for setting the target profit by this method, it is necessary to classify the corporation into 12 categories determined by the size of capital stock, the amount of legal reserve increases targeted ; and the existence of an excess of dividends and officer's bonuses over the profit available for distribution.