This workout asks us to calculate normalized net income and normalized effective tax rate, normalized is just another word for cleaned So the cleaned net income and cleaned effective tax rate If you want to pause the recording and have a go on your own, do so now! So what's been provided to us? We've got an income statement and underneath that a few extra notes A non-recurring expense exists in cost of goods sold of 400 and there is a marginal tax rate of 22% In order to calculate the normalized net income, I'm going to need to start with profit before tax, tax and the income as reported So I've got those figures here, the profit before tax was 1,270.8 Tax was 191.6 and net income was a 1,079.2 and I've pulled them straight from the question What I now need to do, is I need to make some adjustments and I'm going to start with profit before tax As we've got a non-recurring expense, I'm going to add that back so profit before tax will go up by 400 So my cleaned figure will be 400 higher at 1,670.8 Slightly harder now is to calculate how much the tax increases by, if profit before tax has gone up, tax does need to go up but by how much? Well I'm going to take that 400 and I'm going to apply the tax rate to it, the marginal tax rate of 22% My profit has gone up marginally by 400 therefore I need to apply the marginal tax rates So that's what we've done here, I've taken the 400 and multiplied it by 22% and that's given me a tax expense increase of 88 I now sum up the original tax plus the adjustment (the new tax) to get me to a figure of 279.6 Great! That's basically everything I needed to get to my new net income, profit before tax minus tax will get me my new net income of 1,391.2 No we were also asked to calculate the effective tax rate, so I could calculate the reported effective tax rate first and that was 191.6 divided by the profit before tax of 1,270.8 Now after cleaning or normalizing the tax and the profit before tax, I've got the two figures I need to calculate the normalized or cleaned effective tax rates I take the 279.6 and divide it by the 1,670.8 We might notice in this case the effective tax rate has gone up from 15.1 to 16.7