Continued and

Discontinued Operations
Learning Outcomes

 Identify and analyze statement of comprehensive income based on their

elements
What Is Income From Continuing Operations?

 Income from continuing operations is a net income category found on the

income statement that accounts for a company’s regular business activities.
 Income from continuing operations is also known as operating income.
 Continuing operations are the primary source of income for most successful
businesses.
 Income from continuing operations is a net income category found on the income statement that
accounts for a company’s regular business activities. Income from continuing operations is also
known as operating income. A multistep income statement reports income from continuing
operations separately from nonoperating income. A business must consistently generate earnings
 from operations to succeed in the long term.
 Continuing operations are the primary source of income for most successful businesses. If a
company makes most of its money from noncore activities, some analysts may raise red flags.
For instance, a car company may be headed for trouble if it is making far more money from its
financing and credit operations than from selling automobiles.
An Example of Income From Continuing Operations

 Assume, for example, that XYZ manufactures casual clothing and that it also
sells an expensive piece of machinery during the year. The gain or loss on a
machinery sale is part of other revenue and expenses. The machinery sale is
an unusual item that is not directly related to daily business operations.
Income earned from the equipment sale is part of the profit margin, but
selling assets is not a sustainable way to generate profits.
 Profit margin is a financial ratio defined as net income divided by sales. The hypothetical
clothing company XYZ will usually derive the majority of both net income and sales from
continuing operations.

 There are several ways that XYZ can increase income from continuing operations. The firm can
grow sales by adding new customers and creating new clothing product lines. XYZ can also cut
costs and raise prices to generate more income for every dollar of sales.
 Well-managed companies also maximize the sales generated from using assets, and the 
asset turnover ratio equals total sales divided by average total assets. When XYZ purchases
machinery and equipment to make clothing, the firm wants to maximize the sales generated
from using the assets to make and sell clothing. The analysis is different when XYZ recognizes a
gain on the sale of investment securities. This transaction generates additional income, but it
does not improve the asset turnover ratio.
Discontinued operations
  Discontinued operations are essentially the portion of an entity that no
longer functions within the core business units or product lines of the entity
and is reported separately on the income statement.

 Companies often cancel product lines, dispose of equipment, sell market

segments, and shift their business models. All of these structural changes
result in discontinued product lines, profit centers, or business units.
EXAMPLE

 Let’s say a company sells 20 different models of telephones, and the products
are divided into 2 separate business units: the Rotary Phone Business Unit and
the Wireless Phone Business Unit. Each of the business units sells 10 models of
telephones, and each model is clearly defined into their respective business
units.
 The telephone industry has advanced greatly over the years, and the company
has experienced a major decline in sales as well as deteriorating profit
margins within the Rotary Phone Business Unit. This is attributed to aging
technology, and the fact that wireless phone technology has become much
more affordable to the overall market.
 As a result, the board of directors and management of the company have decided to sell or
dispose of all aspects of the Rotary Phone Business Unit. They’ve made the strategic decision to
only focus on the Wireless Phone Business Unit, and all aspects of Rotary Phone Business Unit,
including all 10 models of telephones within the business unit are considered discontinued.
 The company will disclose this information within the financial statements, and the company
will clearly define all financial impacts of the Rotary Phone Business Unit within the
discontinued activities section of the financial statements (including impacts to the 
Balance Sheet and Profit & Loss Statement).