Statement Odd & Ends
Back to Basics, Part 13
We've examined cost of goods sold and operating expenses.
We'll continue our travels down the income statement with a few other
expense and income items.
Companies will often incur debt and subsequently interest expense
when they expand the business or fall short of cash. While debt is not always
a bad thing (often it's essential in a growing business), when interest expense
growth outpaces that of sales and gross profit, it's often a sign of trouble
ahead. Interest expense, which equals debt payable plus interest, is generally
found just below operating income on the income statement.
Other expenses is a catchall category for any nonoperating costs or
expenses that do not fit neatly into the headings we've already covered.
The income statement presented in a company's quarterly report almost
always differs from the income statement that it files with your friend in
government, the Internal Revenue Service. The variances are due to gaps in
timing that exist between GAAP accounting and accounting for tax purposes.
These differences are considered temporary and are expected to converge with
Deferred tax liabilities arise when a company pays less tax than due according
to GAAP accounting, and deferred tax assets stem from paying more tax than due
under the same rules.
When a company decides to sell or abandon a segment of its business,
it will experience a gain or loss as a result of that transaction; this amount
will appear on the income statement. Since the exact result of the transaction
will not be known until the actual disposal date, the company will report expected
results based on guidelines for disclosure of likely contingencies. If a loss
is expected on disposal, that loss will be reported on the income statement
in the same period that the decision was made to sell. If, however, a gain
is anticipated, the gain will not appear on the income statement until the
fiscal year in which the actual transaction occurs.
Gains or losses that result from operations of a discontinued segment prior to
disposal will also appear in a separate category on the income statement. Gains
and losses from discontinued operations usually appear after income from continuing
operations and are presented as after-tax figures. Gains generally result in
higher taxes, while losses often result in tax savings.
Keeping an eye on income from discontinued operations and focusing on income
from continuing operations rather than net income will provide a better gauge
of future earnings expectations.
Extraordinary items are gains and losses resulting from transactions that take
place outside of normal business operations. In order to be classified as an
extraordinary item, the event must be both unusual, meaning it is unrelated to
typical activities of the company, and nonrecurring. Similar to discontinued
operations, extraordinary items appear on the income statement net of income
taxes. Examples of extraordinary items could include the early extinguishment
of debt or damages incurred from an earthquake.
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