3.4 Income Statement Details and Discontinued Operations

Multi-Step Income Statement

• Advantages: Useful for analysts to assess trends in revenue from continuing operations.

Other Revenue, Other Gains, Other Expense, Other Loss

• Details about this category lead to taxable income.
• Subtract income tax expense to arrive at income from continuing operations.

Discontinued Operations

• Reporting requires a subtotal: income from continuing operations.
• Income from continuing operations is an after-tax value.
• Anything reported after this disclosure must also be on an after-tax basis.
• Discontinued operations must be reported on an after-tax basis. This means any gains or losses from discontinued operations are shown net of their respective tax effects.

Unusual and Non-Recurring Items

• A list of items that need to be included on a company's income statement if they occurred in the current period.
• Unusual and infrequent gains and losses are in the non-operating section.
• Provide taxable income to calculate income tax expense.

Material Amount Disclosure

• If unusual or infrequent gains/losses are material (sizable enough to influence user's opinion), disclose them separately in the non-operating section of the income statement.

Items Routinely Classified

• Sale of Old Plant Property and Equipment: Companies sell off old equipment, generating gains or losses.
• Sale of Intangible Assets: Patents, copyrights, trademarks, or trade names can be sold, resulting in gains or losses.
• Sale of Investments: Selling investments leads to gains or losses.
• Write-Down of Inventories: If the value of inventory is impaired we have to write them down.
• Impairment Loss: Classified as an unusual or infrequent loss and reported in the non-operating section of the income statement.
• Impairment of Long-Term Assets: Plant, property, equipment, and intangibles may need to be written down if their book value cannot be recovered.
• Gain or Loss from Early Retirement of Long-Term Debt: This is an unusual or infrequent event.

Restructuring Charges

• Often categorized as unusual and infrequent costs.
• Example: Macy's closing retail stores, incurring lease termination costs, severance packages, and legal fees.

Labor Strikes

• Losses resulting from labor union strikes are reported in this section.

Casualty Losses

• Losses due to hurricane, tornado, fire, flood, or theft are reported here.

Expropriation by Government Authority

• If a government seizes a company's assets and forces a sale, gains or losses are reported here.
• Example: Verizon was forced to sell its assets in Venezuela to the Venezuelan government.

Prohibition Under a New Law

• A new law might prohibit the manufacture of a product.

Other Revenues and Expenses

• Other revenues: dividend revenue, interest revenue, etc.
• Other expenses: interest expense, etc.

Diagram of Income Statement

Operating Activities

* Items routinely engaged in every day we open our doors for business.

Non-Operating Section

* Unusual/non-recurring items:
    * Impairment losses
    * Early retirement of debt
    * Losses due to casualty/expropriation
    * Restructuring charges
    * Labor strike

• Section one plus or minus section two gives us our taxable income.