2 extraordinary items gains or losses from events

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Chapter 3 / Exercise E3-27
Survey of Accounting
Warren
Expert Verified
2. Extraordinary items Gains or losses from events that are both unusual and infrequent and are, therefore, excluded from income from continuing operations. EXHIBIT 2.6 General Income Statement Format Sales 2 Cost of goods sold Gross profit 2 Operating expenses 2 Nonoperating expenses ( 1 Nonoperating revenues) 2 Tax expense Income from continuing operations 6 Discontinued operations, net of tax 6 Extraordinary items, net of tax Net income These two components are segregated because they represent transitory items , which reflect transactions or events that are unlikely to recur. Many readers of financial statements are interested in future company performance. They analyze current-year financial statements to gain clues to better predict future perfor- mance. (Stock prices, for example, are based on a company’s expected profits and cash flows.) Transitory items, by definition, are unlikely to arise in future periods. Although transitory items can help us analyze past performance, they are largely irrelevant to predicting future performance. This means that investors and other users tend to focus on income from continuing operations because that is the level of profitability that is likely to persist (continue) into the future. Likewise, the financial Tax expense applies to income from continuing operations Transitory items are those not expected to recur 2-13 Module 2 | Introducing Financial Statements and Transaction Analysis
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Chapter 3 / Exercise E3-27
Survey of Accounting
Warren
Expert Verified
press tends to focus on income from continuing operations when it discloses corporate earnings (often described as earnings before one-time charges ). IFRS INSIGHT Balance Sheet and Income Statement under IFRS U.S. GAAP and IFRS require a similar set of financial statements with similar formats. Both stan- dards require current and long-term classifications for assets and liabilities, and both recognize revenues when earned and expenses when incurred. Although differences between U.S. GAAP and IFRS do exist at the “detailed level,” there are at least three broader differences worth mention: n GAAP makes no formal prescription for the balance sheet and the income statement; how- ever, the SEC does prescribe the types of accounts and number of years that should be disclosed per Reg. S-X. This listing of required accounts is more detailed: Reg. S-X requires three years of comparative income statements whereas IFRS requires only two. n GAAP requires the reporting of extraordinary items as a separate category of the income statement if they are unusual and infrequent; IFRS has no extraordinary item category. n For items that are either unusual or infrequent, but not both, GAAP requires separate presen- tation in the income statement as a component of earnings from continuing operations; IFRS also requires disclosure of these items, but allows for such disclosure in footnotes to financial statements as an alternative to the income statement.

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