Chapter 4 Discussion - 1. What are Extraordinary Items on...

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1. What are Extraordinary Items on the Income Statement? Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item: a. Unusual nature—the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates. b. b. Infrequency of occurrence—the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates. Is earthquake loss in California considered an extraordinary item on the Income Statement? My answer to this is No. A natural disaster such as an earthquake, meets the definition of unusual (unrelated to the typical activities of the business). But because the business is located in California, the quake would not be considered nonrecurring and therefore could not be considered extraordinary. 2. Why should be caution exercised in the use of income figure derived from an income statement? Income Statement has usefulness, but also has some limitations. Additionally, net income is an estimate and reflects a number of assumptions, and therefore users of income statement should be aware of certain limitations associated with its information. Some of these limitations are:
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Chapter 4 Discussion - 1. What are Extraordinary Items on...

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