Reading 32: Understanding the Income Statement-LOS f 习题精选

Changes in accounting principle require retrospective presentation. A change in the salvage value of an asset is a change in accounting estimate, which does not apply retrospectively.

Unusual or infrequent items appear as a component of net income from continuing operations and are reported "above the line." Extraordinary items, such as expropriations, are unusual and infrequent and appear "below the line."

Interest expense would be considered an expense that is incurred from continuing operations and, therefore, is listed prior to subtracting the income tax expense on the income statement. Income from discontinued operations and extraordinary items are included on the income statement after the net income from continuing operations is reported and after the income tax expense from continuing operations is reported. Therefore, these latter accounts are reported net of tax.

The key word here is "or." Unusual or infrequent items are unusual or infrequent, but NOT both. These items are reported (as a separate line item) as a component of net income from continuing operations.

Examples of unusual or infrequent items include:

• Gains or losses from the disposal of a business segment (employee separation costs, plant shutdown costs, etc.)
• Gains or losses from the sale of assets or investments in subsidiaries
• Provisions for environmental remediation
• Impairments, write-offs, write-downs, and restructuring costs
• Integration expenses associated iwth businesses that have been recently acquired.

Explanations for incorrect answers are as follows:

• The gain on the sale of a subsidiary is an unusual or infrequent item.
• The results of a discontinued segment are reported below the line, net of tax (after tax).

Extraordinary items are unusual and infrequent events that are reported separately, net of tax "below the line." Examples are expropriations by foreign governments and uninsured losses from earthquakes, eruptions, and tornadoes.

Extraordinary items are unusual and infrequent items reported below the line net of taxes. “Below the line” means after net income from continuing operations but before net income.

- Accounting errors go directly to retained earnings.

Changes in accounting estimates are not treated the same as changes in principles. Changes in principles are treated retrospectively, whereas changes in accounting estimates are accounted for in the current and future periods. Both remaining statements are accurate.

Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.