CHAPTER 13Financial Statement Analysis: The Big Picture CHAPTER OVERVIEWThis chapter is essentially a capstone chapter for the textbook. You will learn about several new items: sustainable income and irregular items such as discontinued operations and extraordinary items; changes in accounting principle; comprehensive income; and horizontal and vertical analysis. You will revisit ratios learned in prior chapters, focusing on what the ratios indicate, and will learn about the limitations of financial analysis. Finally, you will study the concept of quality of earnings. REVIEW OF SPECIFIC STUDY OBJECTIVESSO1. Understand the concept of sustainable income. ¿Sustainable incomeis net income adjusted for irregular items. It is the most likely level of income to be obtained in the future, to the extent that this year's net income is a good predictor of future years' net income. SO2. Understand how irregular items are presented. ¿There are two types of irregular items: discontinued operations and extraordinaryitems. Both items are reported net of income taxes. If there is an extraordinary loss of $100,000 and the tax rate is 30%, then the loss is reported at its net amount of $70,000 (the $30,000 of income taxes is actually a tax savings in the case of a loss). ¿Discontinued operationsrefer to the disposal of a significant segment of a business, such as the elimination of a major class of customers or an entire activity. The income statement should report income from continuing operations and income (or
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