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Thus the classification of items on the income

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Unformatted text preview: ns probably would not be considered to be extraordinary. c. The entire loss would have been $69.231 million. That is, the after­tax loss of $36 million divided by (1 – tax rate of 48%). The journal entries would be: Extraordinary Loss from Volcano Eruption (Lo, –SE) 69,231,000 Timberland (–A) 69,231,000 Recognized extraordinary loss from volcano eruption. Income Tax Liability (–L) Extraordinary Loss from Volcano Eruption (–Lo, +SE) Recognized tax benefit from volcano eruption. 33,231,000 33,231,000 ID13–4 a. Standard & Poor's may have viewed the charge as different from previous years and felt including it would distort comparisons from year to year. Value Line may have felt that the exclusion of the charge would be a distortion of the income for the year. b. The income statement is comprised of several categories. Revenues and expenses that are both usual and frequent are classified as operations. Revenues and expenses that are either usual or frequent, but not both, are classified as other revenues and expenses and considered part of continuing operations. Following continuing operations are special items. Such items, in order of their disclosure, are discontinued operations, extraordinary items (which are both unusual and infrequent), and the cumulative effect of accounting changes. All items listed after continuing operations are disclosed net of the associated tax effect. c. All items listed on a company's income statement are important in that these items affect a company's actual financial position and/or the amounts reported on the balance sheet for assets and liabilities. Thus, financial analysts do not care how or where the information is recorded as long as the information is available. Alternatively, the location of items on the income statement can have important economic consequences. For example, if a company's management receives incentive compensation based on income, it is important whether the incentive compensation contract defines income as income from operations, income from continuing operations, or net income. Whether something is classified as an operating expense, an other expense, or an extraordinary loss, therefore, would affect management's incentive compensation, depending on how income is defined. In addition, stockholders are interested in a company's earning power, i.e., the company's ability to generate net assets on an ongoing basis. If the company were to include items as part of income from continuing operations that were not expected to continue on into the future, stockholders would be receiving distorted information that could cause them to misvalue the company's stock. Thus, the classification of items on the income statement could affect the magnitude of management's incentive compensation as well as the valuation of the entire company. ID13–5 a. b. Analysts are many times looking for companies that will be the dominant company in different business categories. The internet has provided an alternative method for selling goods and services to the public. Since this is a new industry many analysts were not sure how much market share this channel would take away from the tra...
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