Week 7 –

Chapter 6
ACCT 6301
FALL 2019

09/29/2019 ©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 1

 Chapter 6 Lecture

Tonight’s
Topics
SUA Part 3 Grading

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Chapter 6 – Reporting
and Analyzing
Revenues, Receivables,
and Operating Income
ACCT 6301 – FINANCIAL ACCOUNTING – FALL 2019

09/29/2019 ©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 3

Income Statement
Income statement information is used…
To predict future performance for investment purposes
To assess the creditworthiness of a company
To evaluate the quality of management

The income statement attempts to answer…

How profitable is the company?

How did it achieve that profitability?
Will the current profitability level persist?

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Income Statement
Classifications
Income Statement Classifications

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Reporting Operating Income

Operating activities
The primary transactions and
events of a company
Separated from non-operating
activities on the statement

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 Describe and
apply the
Learning Objective
LEARNING criteria for
determining
OBJECTIVE 1

when revenue
is recognized.
©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 7
Regulators’ Concerns
with Revenue Recognition
Revenue is a important measure of customers’ response to a company’s
offerings of products and/or services.
Revenue recognition can be subject to manipulation by management when
attempting to meet performance targets.
SEC is often concerned about premature revenue recognition.
Footnote disclosures are an important tool for investors

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 8

Revenue Recognition Standard
The core principle of the reporting standard is that:
◦ “an entity should recognize revenue to depict transfers of goods and services to customers in
an amount that reflects the consideration to which the entity expects to be entitled in
exchange for those goods and services.”

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 9

There are five steps to be followed in implementing that core standard:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance obligations
Step 5: Recognize revenue when or as the entity satisfies a performance
obligation

Revenue Recognition Standard

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 10
Step 1:Identify the Contract with a
Customer
Existence of a “contract” may involve – but does not require – a legal
document.
Based on normal business practices, e.g., might be an oral agreement or a legal
document.
But, the contract should create enforceable rights and obligations.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 11

Step 2:Identify the Performance
Obligations in the Contract
Identify distinct performance obligations.
These are the “deliverables” that the company agrees to provide to the
customer.
Each performance obligation should be distinct, i.e., capable of providing
benefits on its own or in combination with readily available resources.
Becomes the “unit of account.”

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 12

Step 3:Determine the Transaction
Price
The amount to which the seller expects to be entitled when the contract
performance obligations are fulfilled.
Includes variable consideration:
◦ Price concessions, volume discounts, credits, performance bonuses, royalties, etc.
◦ Requires estimates by management prior to completion of the contract.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 13

Step 4:Allocate the Transaction
Price to Performance
Obligations
Required if there are multiple performance obligations.
Based on Stand-alone Selling Prices (SSPs) of the performance obligations.
◦ If SSPs are not available, then they must be estimated.

Allocate total transaction price based on the individual SSPs.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 14

Step 5:Recognize Revenue when (or
as) the Seller Satisfies a
Performance Obligation
Performance obligation is satisfied when the customer obtains control of the
product or service.
◦ i.e, when the customer obtains the ability to direct the use and obtain substantially all of the
remaining benefits.
◦ This condition may be satisfied over time or at a point in time.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 15

Contract Assets and Liabilities
When a seller received payment (or the unconditional right to payment) prior
to recognizing revenue, a contract liability will be recognized.
◦ May be labeled as “unearned revenue” or “deferred revenue.”

When a seller recognizes revenue before being entitled to bill for payment, a
contract asset will be recognized

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 16

Contract Asset Example
Suppose Company A agrees to deliver 300 units to Company B for $1,000 each. 200 units
should be delivered immediately and the remaining 100 delivered at the beginning of the next
fiscal year.
The companies agree that Company A will send an invoice for the total amount at the time of
the second delivery.
What should Company A recognize when it delivers the first 200?

 $1,000s Balance Sheet   Income Statement

Transaction Cash + Noncash = Liabilities + Contrib. + Earned   Revenues – Expenses = Net
Asset Asset Capital Capital Income
Recognize +200 +200   +200 +200
revenue for Contract = Retained Revenue ‒ =
delivery of asset Earnings
200 units

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 17

Consignment Sales

Consignor delivers merchandise Consignee sells merchandise for

to consignee consignor

Consignor retains ownership until sold by the consignee

Consignor records no sales revenue until inventory is sold by the
consignee

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 18

 Illustrate revenue
and expense
recognition when
Learning Objective
LEARNING
OBJECTIVE 2 the transaction
involves future
deliverables and/or
multiple elements.
©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 19
Revenue Recognition
Subsequent to Customer Purchase
Customers often purchase products or services prior to delivery
Represents an obligation of the selling company
Examples
◦ Magazine or newspaper subscriptions
◦ Season tickets to football or basketball games
◦ Rental income

Amounts paid in advance by customers are recognized as a contract liability

and usually called unearned revenue or deferred revenue

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 20

Recording
Amounts Received in Advance
On January 1, a customer paid $840 for a digital data subscription covering twelve
months.
  Balance Sheet   Income Statement
Noncash Contrib. Earned Net
Transaction Cash Asset + = Liabilities + +   Revenues – Expenses =
Asset Capital Capital Income
Receive $840 +840 +840  
for one-year Cash = Unearned ‒ =
subscriptions Revenue

Cash (+A) 840  

Unearned revenue (+L)   840

Cash(A) Unearned Revenue (L)

840 840

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 21

Recognizing Revenue for
Amounts Previously Received in
Advance
On January 31, recognized revenue for one month of data access provided. $840 /
12 = $70
  Balance Sheet   Income Statement
Noncash Contrib. Earned Net
Transaction Cash Asset + = Liabilities + +   Revenues – Expenses =
Asset Capital Capital Income
Recognize –70 +70   +70 +70
revenue for = Unearned Retained Revenue ‒ =
1 month of Revenue Earnings
data access

Unearned Revenue (–L) 70  

Revenue (+R, +SE)   70

Unearned Revenue (L) Revenue (SE)

70 70

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Bundled Sales
Two or more products or services are sold under the same sales agreement for
one lump-sum price, but are considered separate performance obligations.
Commonplace in software industry where software, training, maintenance, and
customer support are bundled together.

GAAP requires the transaction price be allocated among the

various performance obligations in proportion to
their stand-alone selling prices.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 23

 Illustrate
revenue and
Learning Objective
LEARNING expense
recognition for
OBJECTIVE 3

long-term
projects.
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Accounting for Long-Term
Contracts
When a company agrees to engage in a long-term contract with a customer,
there are a number of reporting issues that arise.
◦ Does the project consist of multiple distinct performance obligations or a single
performance obligation?
◦ What is the expected transaction price?
◦ Are the performance obligations fulfilled at a point in time or over time?
◦ If over time, what is the measure of fulfillment?

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One Performance Obligation and
Cost as the Measure of
Fulfillment
Haskell Construction signed an $8,000,000 contract to build a new library. The
library is a single performance obligation fulfilled over time and cost incurred
reflects the value transferred to the customer.
Cost information:

(in thousands) Year 1 Year 2

Costs Incurred during the Year $1,800 $4,200

Year Cost incurred Revenue Recognized Expense Recognized Gross Profit

1 $1,800 / $6,000 = 30% $8,000 × 30% = $2,400 $1,800 $600
2 $4,200 / $6,000 = 70% $8,000 × 70% = $5,600 4,200 1,400
$6,000 $2,000

Haskell would recognize $600,000 (30%) of gross profit in Year 1

and $1,400,000 in Year 2 (70%).

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 26

Performance Obligation
Fulfilled at a Point in Time
Haskell Construction signed a two-year, $8,000,000 contract to build a new library.
Terms of the contract require that Haskell’s performance obligations are fulfilled at
a point in time (completion).
Cost information:

(in thousands) Year 1 Year 2

Costs Incurred during the Year $1,800 $4,200

Year Revenue Recognized Expense Recognized Gross Profit

1 $0 $ 0 $ 0
2 $8,000 6,000 2,000
$6,000 $2,000

Haskell would recognize no gross profit in Year 1 and

$2,000,000 in Year 2 (100%).

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 27

Comparing
Long-Term Contract Methods
Total gross profit and total revenue are the same over the two-year
period under both methods:
Performance obligations fulfilled over time
Performance obligations fulfilled at a point in time
Fulfilled over time Fulfilled at a point in time
 (in thousands) Year 1 Year 2 Year 1 Year 2

Revenues $2,400 $5,600 $0 $8,000

Expenses 1,800 4,200 0 6,000
Gross profit $ 600 $1,400 $0 $2,000

Only difference in the two methods is when the revenue and

gross profit are recognized.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 28

Accounts Receivable and the
Collectability of Receivables
Risk
Risk of selling on credit is that some customers may not pay
Companies establish credit policies to determine which customers
receive credit
◦ Expected losses are weighed against expected profits generated by offering
credit

GAAP requires companies to estimate the dollar amount of

uncollectible accounts for financial reporting purposes.

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Reporting Accounts Receivable
Reported on the balance sheet as net realizable value (the amount the seller
expects to collect).

Amazon.com’s current asset section of its balance sheet reports a net realizable
value of receivables equal to $16,677 million.

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Reporting Accounts Receivable

Alternative Reporting Format

(Allowance information obtained from the financial statement notes.)

Accounts receivable, gross $17,172

Less allowance for doubtful accounts 495
Net realizable value $16,677

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 31

 Estimate and
account for
Learning Objective
LEARNING
OBJECTIVE 4 uncollectible
accounts
receivable.
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Allowance
for Uncollectible Accounts
A contra-asset representing the amount a company expects that its customers
will not pay
Can be estimated based on
◦ An aging analysis
◦ Focuses on receivables owed by customers that might be uncollectible
◦ Percentage of sales
◦ Focuses on potentially uncollectible accounts among current period sales

Generally, the longer past due an account receivable is, the more likely
it is to be uncollectible.

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Aging of Accounts Receivable
Example
A seller classified its receivable balances based on age and provided estimates of
uncollectible amounts:

Age of Estimated Estimated

Accounts Receivable Receivable Balance % Uncollectible % Uncollectible
Current $41,000 1.0% 1.0%
1-60 days past due 32,000 3.0% 3.0%
61-90 days past due 16,500 4.5% 4.5%
Over 90 days past due 8,700 11.0% 11.0%
Total $98,200

Each
Each balance
balance is
is multiplied
multiplied by
by its
its estimated
estimated
uncollectible
uncollectible percentage.
percentage.

The company estimates that $3,070 out of the $98,200

in Accounts Receivable will prove uncollectible.

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Percentage of Sales
Example
A seller estimates that 2.3% of its sales revenue will be uncollectible for the current year. Sales
totaled $156,000.

The uncollectible amount is:

$156,000 × 2.3% = $3,588

The company estimates that $3,588 will prove uncollectible.

While easier than the aging analysis method,

it is less accurate as it assigns the same percentage to all sales
amounts.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 35

Recording
Sales on Account
Sales for the year totaled $560,000.

  Balance Sheet   Income Statement

Noncash Contrib. Earned Net
Transaction Cash Asset + = Liabilities + +   Revenues – Expenses =
Asset Capital Capital Income
Sell $560,000 +560,000 +560,000   +560,000 +560,000
of sales Accounts = Retained Sales ‒ =
on account Receivable Earnings Revenue

Accounts receivable (+A) 560,000  

Sales (+R, +SE)   560,000

Accounts Receivable(A) Sales Revenue (R)

560,000 560,000

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 36

Recording
Estimated Bad Debt Expense
A seller classified its $98,200 receivable balance based on age, and calculated the
amount to be uncollectible as $3,070.
  Balance Sheet   Income Statement
Cash Noncash – Contra Contrib. Earned Net
Transaction + = Liabilities + +   Revenues – Expenses =
Asset Asset Asset Capital Capital Income
Estimate +3,070 –3,070   +3,070 –3,070
bad debt Allowance for Retained Sales
expense – Uncollectible = Earnings ‒ Revenue =
Accounts
for the
year

Bad debt expense (+E, –SE) 3,070  

Allowance for uncollectible accounts (+XA, –A)   3,070

Allowance for
Bad Debts Expense (E) Uncollectible Accounts (XA)
3,070 3,070

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 37

Recording Write-Offs
of Uncollectible Accounts
During the next accounting period, the seller determined that customers owing
$2,100 were not going to pay. The accounts were written off.

  Balance Sheet   Income Statement

Cash Noncash – Contra Contrib. Earned Net
Transaction Asset + Asset Asset = Liabilities + Capital + Capital   Revenues – Expenses = Income
Write off –2,100 –2,100  
$2,100 in Accounts Allowance for
accounts Receivable – Uncollectible = ‒ =
Accounts
receivable

Allowance for uncollectible accounts (–XA, +A) 2,100  

Accounts receivable (–A)   2,100

Allowance for
Uncollectible Accounts (XA) Accounts Receivable (A)
2,100 2,100

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 38

Effects of a Receivable Write-Off
The write-off causes assets to increase and decrease by the same
amount:
Before Effects of After Account
Write-Off Write-Off Write-Off

Accounts receivable $98,200 $(2,100) $96,100

Less Allowance for uncollectible accounts -3,070 2,100. -970
Accounts receivable, net of allowance $95,130 $ ̶ $95,130

No change occurs to the net realizable value of receivables.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 39

Receivables Footnote Disclosure
Following is an excerpt from Amazon.com’s 2018 footnote disclosure
concerning its receivables:

Accounts Receivable, Net and Other

Included in “Accounts receivable, net and other” on our consolidated balance sheets are amounts
primarily related to customers, vendors, and sellers. As of December 31, 2017 and 2018,
customer receivables, net, were $6.4 billion and $9.4 billion, vendor receivables, net, were $2.6
billion and $3.2 billion, and seller receivables, net, were $692 million and $710 million. Seller
receivables are amounts due from sellers related to our seller lending program, which provides
funding to sellers primarily to procure inventory.
We estimate losses on receivables based on known troubled accounts and historical experience of
losses incurred. Receivables are considered impaired and written-off when it is probable that all
contractual payments due will not be collected in accordance with the terms of the agreement.
The allowance for doubtful accounts was $237 million, $348 million, and $495 million as of
December 31, 2016, 2017, and 2018. Additions to the allowance were $451 million, $626 million,
and $878 million, and deductions to the allowance were $403 million, $515 million, and $731
million in 2016, 2017, and 2018.

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Pledging and Factoring
Receivables
Pledging
◦ Using receivables as collateral for a loan
◦ Disclosed in footnotes
◦ A short-term loan is also presented in the liabilities section of the balance
sheet

Factoring
◦ Selling receivables to a bank or other financial institution
◦ Receivables are removed from the balance sheet if sold

Disclosed in financial statement notes

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 41

Shifting Income
Allowance account sometimes used by managers to shift income from one year
into another
Cookie jar reserve is created

2019 2020

Bad debt expense Less bad debt expense required

overestimated in 2019 creating during 2020 to show higher
a bigger expense profits

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Insight into
Changes in the Allowance Account
Ultimately the amount in the allowance account is controlled by management,
though it is reviewed by the auditor.
A discussion of policies and changes in the allowance is often found in the MD&A
section of a company’s 10-K report
◦ Explains changes in company policies, customers, economic conditions, etc.
◦ Helps explain changes in the allowance account for financial statement users

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Comparing the Allowance
to Gross Receivables
The allowance for uncollectible, or doubtful, accounts is compared
as a percentage of gross receivables for four competitors:
Allowance for Doubtful Accounts as a Percentage of Gross Receivables

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 44

 Calculate return on
net operating assets,
net operating profit after
taxes,
Learning Objective
LEARNING net operating profit
OBJECTIVE 5
margin,
accounts receivable
turnover, and
average collection
period.
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Net Operating Profit After Taxes
Referred to as NOPAT
Widely used performance measure of operating profitability

NOPAT =
Statutory
Net – Nonoperating Nonoperating
– × 1– tax
income revenues expenses
rate

Microsoft’s NOPAT for 2018

NOPAT = $16,571M -[1,416M x (1 ‒ 25%)] = $15,509M

Focuses only on the operating performance

rather than the overall performance of the company.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 46

Return On Net Operating Assets
(RNOA)
Measure of how well the company is performing relative to its core
objective
Conceptually similar to return on assets (ROA) except excludes all
nonoperating components of income and investment

RNOA = Net operating profit after taxes (NOPAT)

Average net operating assets
Microsoft’s RNOA for 2017 and 2018:

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 47

Comparison of RNOA
Several companies’ RNOA amounts are compared:

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Net Operating Profit Margin
(NOPM)
Focuses on the overall operating profitability of a company relative
to its sales revenue.

NOPM = NOPAT
Sales Revenue
Microsoft’s NOPM for 2017 and 2018:

Microsoft generated over 25 cents of operating profit for every dollar of sales in 2017.
That figure decreased to just over 14 cents in 2018.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 49

Comparison of NOPM
Several companies’ NOPM amounts are compared:

Higher NOPM amounts are better.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 50

Assets Receivable Turnover
(ART)
Reflects the investment in receivables required to generate one
dollar of sales.

Accounts Receivable Sales Revenue

=
Turnover Average Accounts Receivable

Microsoft’s ART for 2017 and 2018:

Microsoft collected its receivable balance almost 5 times during 2017 and about 4.5
times in 2018.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 51

Comparison of
Accounts Receivable Turnover
(ART)
Competitors and their receivable turnovers:

Higher receivable turnover implies amounts

are being collected more quickly.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 52

Average Collection Period
Reflects how long, on average, a company takes to collects its
outstanding receivables
Also called Days Sales Outstanding (DSO)

Average
Average Accounts Receivable 365 days
Collection = =
Period Average Daily Sales ART

Microsoft’s DSO for 2018:

[$26,481M + $22,431M ] / 2 81.1 365 days 81.1
= or =
$110,360M / 365 days 4.51 days

Microsoft collects its receivable balance every 81 days, on average.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 53

Insights on Receivables
Receivables turnover and the average collection period provide insight into
◦ Receivables quality
◦ What is occurring if turnover slows?
◦ Deterioration in collectability may be occurring
◦ Seller may have extended its credit terms
◦ Seller may be taking on longer paying customers

◦ If turnover slows, seller may need to increase the allowance account balance

Asset utilization
◦ Asset turnover indicates efficiency and productivity

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 54

 Discuss earnings
management and
explain how it
Learning Objective
LEARNING
OBJECTIVE 6 affects analysis
and interpretation
of financial
statements.
©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 55
Earnings Management
Occurs when management uses discretion to mask the underlying economic
performance of a company
Two motives for earnings management

Motive 1: The desire to mislead some financial statement users

about the financial performance of the company to gain
economic advantage

Motive 2: The desire to influence legal contracts that use reported

accounting numbers to specify contractual obligations
and outcomes

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 56

Earnings Management Tactics
Transaction timing
Overly optimistic or pessimistic estimates
◦ Extensive use of estimates in accrual accounting
◦ Examples
◦ Revenue recognition timing with variable consideration
◦ Depreciation expense estimates of useful lives and salvage values
◦ Bad debts expense

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 57

Channel Stuffing
Arises when a company uses its market power over customers to induce them
to purchase more goods than necessary to meet immediate needs
Usually occurs immediately before the end of a seller’s accounting period
Causes seller’s revenue to increase

Revenue can be recognized as long as the conditions for revenue recognition

(e.g., transfer of title) have been met.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 58

Earnings Management Tactics
Strategic timing of nonrecurring gains and losses
◦ Arise under management’s discretion in reporting certain
amounts
◦ Income smoothing
◦ Occurs when management times gains or losses in order to
maintain a steady improvement in income each year
◦ Big bath
◦ Occurs when management reports the recognition of a
nonrecurring loss in a period of already depressed income

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 59

Earnings Management Tactics
Mischaracterizing transactions as arm’s-length
◦ Sometimes sales are disguised as sales to unrelated entities to inflate income when
1. The buyer is a related party, or
2. Financing is provided or guaranteed by the seller
◦ Transfers of inventory or other assets to related entities should not be recorded until actual
arm’s length transactions occur

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 60

Quality of Earnings
 A term that analysts use
 Describes the extent to which reported income
reflects the underlying economic performance of a
company
 Often compromised by earnings management

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 61

 Appendix 6A

Describe and
Learning Objective
LEARNING
OBJECTIVE 7 illustrate the
reporting for
nonrecurring
items.
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Nonrecurring Income
Items
Useful to separate recurring from nonrecurring on
the income statement
Two reasons:
1. To evaluate company performance or management quality,
current performance is compared with prior year’s
recurring income.
2. Estimation of company value involves forecasts of income
and cash flows in which only recurring amounts should be
expected to recur in the future.

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 Restructuring Charges

Common Expenses and losses related to significant

reorganization of a company’s operations
Nonrecurrin
Discontinued Operations
g Items
Income related to business units that the company
has discontinued and sold or plans to sell

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 64

Discontinued Operations
A separately identifiable business unit that a company sells or intends to sell
How is it reported?
◦ In the income statement below income from continuing operations

Income or loss on discontinued operations (net of tax)…… $340,000

Gain or loss on the sale of the unit (net of tax)……………… 43,000

Since discontinued operations will not persist in the future, they are
reported separately from continuing operations on the income
statement.

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 65

Discontinued Operations
To illustrate, assume that a company’s income statement results
were the following:

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Restructuring Costs
Similar to discontinued operations, except that they do not involve the sale of
a separately identifiable business unit
Involve activities such as
◦ Consolidating production facilities
◦ Reorganizing sales operations
◦ Outsourcing some activities
◦ Discontinuing product lines within a business unit

Included in income from continuing operations

©2020 JEFFREY KROMER AND CAMBRIDGE BUSINESS PUBLISHERS 67

Reporting Restructuring Costs
Consists of two parts

Employee Asset
Severance Costs Write-Downs

Estimated total costs of Write-down of long-term assets

terminating or relocating selected (such as plant assets) as a result
employees of closure or relocation of
manufacturing or administrative
facilities

Reported in the income statement

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