Understanding Income

Statements
Non-Recurring Items and
Non-Operating Items
 Non-Recurring Items
Sales revenues $100,000
COGS $60,000
Gross Profit $40,000
Recurring Items

Rental Expense $10,000

Depreciation $4,000
Operating Income $26,000

Gain on sales of assets $34,000 Unusual or infrequent items

Interest Income $3,000
Interest Expense -$2,000
Income Before Tax $61,000

Tax Provisions $15,000

Income from Continuing Ops $46,000
Recurring

Income from Discontinued Ops $23,000 Discontinued operations

Loss from lawsuit -$15,000 Extraordinary items
Non-

Net Income $54,000

Notes: Changes in estimates… Accounting changes

Non-Recurring Items and Non-Operating Items
 Non-Recurring Items
Sales revenues $100,000
Discontinued operations
COGS $60,000
• management has decided to dispose of, but not completed yet
Gross Profit $40,000
• physically and operationally distinct from the rest of the firm
Recurring Items

Rental Expense $10,000 • reported net of tax, after income from continuous operations
Depreciation $4,000 • Analyst: Eliminate such items in forming future earning expectations
Operating Income $26,000
Extraordinary items
Gain onUnusual
sales of or infrequent items$34,000
assets • both unusual AND infrequent
Interest Income $3,000
• e.g. losses from an expropriation of assets, natural disasters
Interest Expense -$2,000
Income Before Tax $61,000 • reported net of tax, after income from continuous operations
• Prohibited under IFRS. After Dec 2015, prohibited under US GAAP.
Tax Provisions $15,000
Income from Continuing Ops $46,000 Unusual or infrequent items
• unusual in nature, OR infrequent in occurrence, but not both
Recurring

Income from
Discontinued
Discontinued
operations
Ops $23,000 • e.g. gains from asset sale, impairments, restructuring costs
Extraordinary items -$15,000
Loss from lawsuit
Non-

• reported before tax, part of income from continuous operations

Net Income $54,000 • Analyst: Assess whether the items are likely to reoccur

Accounting
Notes: Changes changes
in estimates…

Non-Recurring Items and Non-Operating Items

 Non-Recurring Items
Sales revenues $100,000
COGS $60,000 Accounting changes
Gross Profit $40,000
Changes in accounting principle
Recurring Items

Rental Expense $10,000 • e.g. change in inventory accounting from LIFO to FIFO
Depreciation $4,000 • requires retrospective application (i.e. all of the prior-period financial
Operating Income $26,000 statements currently presented are restated)

Gain onUnusual
sales of or infrequent items$34,000
assets Changes in accounting estimates
Interest Income $3,000
Interest Expense -$2,000 • change in management’s judgement
Income Before Tax $61,000 • e.g. change in residual value of a long-lived asset
• applied prospectively (i.e. applied to the financial statements for the
Tax Provisions $15,000 current and future periods)
Income from Continuing Ops $46,000
Prior period adjustments
Recurring

Income from
Discontinued
Discontinued
operations
Ops $23,000
Extraordinary items -$15,000
• correction of an error for a prior period
Loss from lawsuit
Non-

• restate the financial statements for all prior periods presented in the
Net Income $54,000 current financial statements
• Need to disclose nature of adjustment and its effect on net income
Accounting
Notes: Changes changes
in estimates…

Non-Recurring Items and Non-Operating Items

 Non-Operating Items
Sales revenues $100,000
Operating
COGS $60,000
Gross Profit $40,000 • Activities involving producing and delivering goods
• Activities involving the provision of services
Rental Expense $10,000 • Include all transactions that are NOT investing or financing activities
Depreciation $4,000
Operating Income $26,000

Gain on sales of assets $34,000

Non-Operating Items

Interest Income $3,000 • Non-financial company invests in equity or debt securities issued by
Interest Expense -$2,000 another company
Income Before Tax $61,000 • Interest, dividends, or profits from sales of these securities will be
shown as non-operating income
Tax Provisions $15,000
Income from Continuing Ops $46,000
• Interest expense for non-financial companies classified as non-
Income from Discontinued Ops $23,000 operating
Loss from lawsuit -$15,000
Note: For financial service companies, interest ncome and expense
Net Income $54,000 are likely components of operating activities

Notes: Changes in estimates…

Non-Recurring Items and Non-Operating Items

prepnuggets.com