Woodson Wiery Dobson Laurey LLP
TO:James Lowe, CFO
FROM:Frank Durham, Senior Accountant - 156
DATE:October 26, 2005
SUBJECT:RESULTS FOR INCOME STATEMENT PREPARATION OF SEVERAL EVENTS
I’ve completed the research task concerning certain events relative to financial statement reporting. Discussed below are these particular events which occurred and the appropriate reporting methods in regards to income statement preparation for Income from Continuing Operations and Separately Reported Items.
Income from Continuing Operationsincludes Operating Income which includes revenues and expenses directly related to the “ongoing major” revenue-generating functions of a company (CON 6, ¶ 87, 2004). Additionally, Non-Operating Income includes gains and losses from events or transactions (activities) which are incidental to the company such as income from investments or perhaps the sale of operating assets (CON 6, ¶ 85, 2004). If a company- engaged in the manufacturing of high technology products- incurred a loss on the write-down of inventory due to obsolescence, an operating lossoccurs and thereforereports as anoperating expense in the current period. According to ARB 43, the incurred loss complies with the lower-of-cost-or-market rule purported to reflect fairly the utility loss of the inventory against the revenues of the period (ARB 43, ¶ 8, 9, and 11). If a cosmetic company decided to discontinue the manufacture of a line of women’s lipstick, while other lines of cosmetics continued manufactured processing, they could not incur the loss from the sale of the related assets of this particular line of products as a discontinued operation. According to FAS 144, this product line does not meet the criteria for a discontinued component whereas it can be distinguished, “operationally and for financial reporting purposes,”from the rest of the business (FAS 144,¶ 41, 2004). Therefore, we report this event as a loss reported under Non-Operating Income. If a manufacturing company recognizes a loss on the sale of equipment used in its manufacturing operations, it reports that as a loss under Non-Operating Income (CON 6,¶ 85, 2004).
Separately Reported Items are events that should be excluded from Continuing Operations due to their nature.They include transitory earnings and events unlikely to occur again in the company’s future. These include Discontinued Operations, Extraordinary Items (unusual and infrequent),and a Cumulative Effect of a Change in Accounting Principles. As of May 30, 2005, if a company changes its depreciation method from Double-Declining-Balance to Straight-line method, they “shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods” presented on the comparable income statement as a cumulative effect of a change in accounting principles (FAS 154, ¶ 7, 2005). Similarly, according to FAS 154,if an error occurred where the depreciation expense was overstated due to a miscalculation and discovered in a subsequent year, it “shall be reported as a prior-period adjustment by restating the prior-period financial statements” (FAS 154, ¶ 25, 2005). Furthermore, the restatement includes the cumulative effect of the error to prior periods which will be reflected in the carrying amounts of the accumulated depreciation control account as well as an adjustment made to the beginning retained earnings account. Additionally, financial statements for prior periods will be adjusted to reflect this correction (FAS 154, ¶ 25 [a,b, and c], 2005). These corrections are not included in the income statement, but disclosed on the Statement of Retained Earnings. Lastly, if an automobile manufacturer sells all of the assets related to its financing business and this component can be distinguished from the rest of the entity according to FAS 144, it can be considered a discontinued operation. This will be reported, net of tax, separately after Income fromContinuing Operations.
Thank you for this opportunity to assist you in your research. Please do not hesitate to contact me regarding this information or any other matters.
James Lowe, CFO
October 26, 2005
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REFERENCES
ARB 43—Restatement and Revision of Accounting Research Bulletins. ¶ 8—Inventory Pricing- Chapter 4.
Statement 5- Discussion. Accounting Research Bulletin. (2004). Financial Accounting Research
System (FARS). Published by the Financial Accounting Standards Board.
ARB 43—Restatement and Revision of Accounting Research Bulletins. ¶ 9—Inventory Pricing- Chapter 4.
Statement 6- Discussion. Accounting Research Bulletin. (2004). Financial Accounting Research
System (FARS). Published by the Financial Accounting Standards Board.
ARB 43—Restatement and Revision of Accounting Research Bulletins. ¶ 11—Inventory Pricing- Chapter 4.
Statement 7- Discussion. Accounting Research Bulletin. (2004). Financial Accounting Research
System (FARS). Published by the Financial Accounting Standards Board.
CON 6—Elements of Financial Statements. ¶ 85—Characteristics of Gains and Losses. Statement of
Statement of Financial Accounting Concept. (2004). Financial Accounting Research System
(FARS). Published by the Financial Accounting Standards Board.
CON 6—Elements of Financial Statements. ¶ 87—Characteristics of Gains and Losses. Statement of
Statement of Financial Accounting Concept. (2004). Financial Accounting Research System
(FARS). Published by the Financial Accounting Standards Board.
FAS 144—Accounting for the Impairment or Disposal of Long-Lived Assets. ¶ 41—Reporting
Discontinued Operations. Statement of Financial Accounting Standard. (2004). Financial
Accounting Research System (FARS). Published by the Financial Accounting Standards Board.
FAS 154—Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB
Statement No. 3. ¶ 7—Change in Accounting Principle. Statement of Financial Accounting
Standard. (2005). Referenced on 10/17/05.
FAS 154—Accounting Changes and Error Corrections- a replacement of APB Opinion No. 20 and FASB
Statement No. 3. ¶ 25—Correction of an Error in Previously Issued Financial Statements.
Statement of Financial Accounting Standard. (2005). Referenced on 10/17/05.
Email: hone: (310) 490-3857