Just to shed more light on this case, extraordinary items are events and transactions that meet two conditions: They are unusual in nature and infrequent in occurrence. To be considered unusual, the item should be abnormal and only incidentally related to the customary activities of the entity. To be regarded as infrequent, the event or transaction should not be reasonably expected to recur in the foreseeable future. A company must evaluate both criteria in terms of the environment in which it operates.
Thus, Weyerhaeuser Co. reported the $36 million in damages to its timberland caused by the eruption of Mount St. Helens as an extraordinary item because the event was both unusual and infrequent. In contrast, Florida Citrus Company does not report frost damage to its citrus crop as an extraordinary item because frost damage is not viewed as infrequent. In this case car dealership may sell other cars but frequency of selling a rare Invicta may be nil and considering the business environment particular car will be considered abnormal so it does meet both the criteria to qualify for the unusual gain derive from an extraordinary transaction.
Reference: Kimmel. Financial Accounting, 6th Edition.Bookshelf. Web. 16 May 2013 <http://devry.vitalsource.com/books/9781118233634>.
Should the creator’s and user’s needs be the same or different?
Basics of single step income statements are revenue less expenses is the net income. Single step income statements are made for very small business entities and not for the public entities. General purpose or absorption income statements are normally multi steps income statements and can have multiple users such as employee unions, government authorities, investors, suppliers and including its creator. Income statement such as contribution margin income statement are for internal management purpose only since it contains important product costing information and creator of such type of income statement is the user of it. Usually, multistep income statement better serve the need of the user allowing them to use the ratio analysis through income statement aiding their decision making process.
The multiple-step income statement format highlights the computation of gross profit and operating income. In general, net income reflects the results of a company’s operations for a period. Comprehensive income, on the other hand, reflects the overall change in a company’s wealth during a period and includes items that, in general, arise from changes in market conditions unrelated to the business operations of a company. The items included in comprehensive income are, in addition to net income is foreign currency translation adjustments, unrealized gains and losses on available-for-sale securities and deferred gains and losses on derivative financial instruments.
6. A steel company changes from the average cost method to the FIFO method for inventory costing purposes. Answer – Changes in accounting principle
7. A construction company, at great expense, prepared a major proposal for a government loan. The loan is not approved. Answer – Correction of errors
8. A water pump manufacturer has had large losses resulting from a strike by its employees early in the year. Answer – Unusual gain or loss
9. Depreciation for a prior period was incorrectly understated by $950,000. The error was discovered in the current year. Answer – Corrections of errors
10. A large sheep rancher suffered a major loss because the state required that all sheep in the state be killed to halt the spread of a rare disease. Such a situation has not occurred in the state for 20 years. Answer – Extraordinary items ( Criteria Unusual and Infrequent )
11. A food distributor that sells wholesale to supermarket chains and to fast-food restaurants (two distinguishable classes of customers) decides to discontinue the division that sells to one of the two classes of customers. Answer – Discontinued operations