Sub: Financial Accounting Topic:
Financial Statement Analysis
Classification and Format in the Income Statement
Investors commonly assess a firm’s value based on the firm’s expected future sustainable
earningsstream. To inform analysts and other financial statement users about sustainable earnings, firmsoften report income from recurring business activities separately from income effects from unusualor nonrecurring activities (such as asset impairments, restructuring, discontinued business segments,and extraordinary events). To provide more useful information for prediction, U.S. GAAP (
GenerallyAccepted Accounting Principles
) requires that the income statement include some or all of thefollowing sections or categories depend
ing on the nature of the firm’s
income for a period:
Income from Continuing Operations.
Reports the revenues and expenses of activities inwhich a firm anticipates an ongoing involvement. When a firm does not have items in thesecond and third categories of income in a particular year, all of its income items are relatedto continuing operations; so it does not need to use the continuing operations label. Firmsreport their expenses in various ways. Most firms in the United States report expenses bytheir function: cost of goods sold for manufacturing, selling expenses for marketing,administrative expenses for administrative management, and interest expense for financing.Other firms, particularly those in the European Community, tend to report expenses by theirnature: raw materials, compensation, advertising, and research and development.
Income from Discontinued Operations.
A firm that intends to remain in a line of business butdecides to sell or close down some portion of that line (such as closing a single plant ordropping a line of products) generally will report any income, gain, or loss from such an actionunder continuing operations. On the other hand, if a firm decides to terminate itsinvolvement in a line of business (such as selling or shuttering an entire division or subsidiary),