When should a company disclose extraordinary items on their income statement? Why do you think that this disclosure is made after income from operations on the income statement?
Solution
An extraordinary item is an event which is not related to ordinary activity of the company.It is unlikely to recur in the forseeable future.It is an abnormal event. E.g are Effects of a strike, Abandonment of property, Intangible assets. Company should disclose extraordinary item if it is material. Materiality is considered in relation to Income before extraordinary items, trend of annual earnings before extraordinary items etc. It is disclosed after income from operations because it is not a part of normal activities of company. Purpose of making such a disclosure is to present a true and fair view i.e. the users of financial statemnets can analyse the items which are totally unrelated to the operational and Financial results of the business. Extraordinary items should be presented separately, and after the results of ordinary operations in the income statement, along with disclosure of the nature of the items, and net of related income taxes.
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When should a company disclose extraordinary items on their income sta (1).docx
1. When should a company disclose extraordinary items on their income statement? Why do you
think that this disclosure is made after income from operations on the income statement?
Solution
An extraordinary item is an event which is not related to ordinary activity of the company.It is
unlikely to recur in the forseeable future.It is an abnormal event. E.g are Effects of a strike,
Abandonment of property, Intangible assets. Company should disclose extraordinary item if it is
material. Materiality is considered in relation to Income before extraordinary items, trend of
annual earnings before extraordinary items etc. It is disclosed after income from operations
because it is not a part of normal activities of company. Purpose of making such a disclosure is
to present a true and fair view i.e. the users of financial statemnets can analyse the items which
are totally unrelated to the operational and Financial results of the business. Extraordinary items
should be presented separately, and after the results of ordinary operations in the income
statement, along with disclosure of the nature of the items, and net of related income taxes.
