Discontinued Operations and Extraordinary Items - Video Tutorials & Practice Problems
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Discontinued Operations
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So let's quickly discuss two non recurring items that appear on our income statement, discontinued operations and extraordinary items. So the first one here, discontinued operations. This is when the company is planning to exit a major component of its business. Okay? It's exiting a business. So it's discontinuing some operations. It's not closing down its business altogether, it's just a portion of the business. So imagine there's a computer company that sells computers and service repair contracts. So they're selling both, they sell a computer and then they'll say, hey we'll repair the computer if you pay for this contract. But let's say it says you know what? The service contracts aren't making us that much money. Let's discontinue service contracts and just sell computers. So it's gonna have to do some special presentations of these discontinued operations. Okay. But I want to make a note that it's beyond the scope of this class. We're not gonna get into the details of discontinued operations. The most that you really need to know about it is that it shows up on the income statement and we show it separate from our regular operations, right? We're gonna show our income from our continuing operations. Just like we usually do, we're gonna show our revenue or sales or excuse me, our revenue, our cost of goods, sold, our operating expenses, all of that. But then we're gonna show are discontinued operations separately. How are we gonna show it? We're gonna show it at the bottom. So the first thing we want to note is that it's a non recurring item, right? Non both discontinued operations and extraordinary items are non recurring. We're not expecting for these things to show up on our income statement every year. Okay. So they're not a persistent activity of the business. We're expecting these discontinued operations to stop very soon. Okay. And when we show them on the income statement, like I said, we're not going to show them with the rest of our income, we're not going to bunch up the sales of the service contracts with the sales of the computers. No, we need to separate everything related to the discontinued operations. And what we're going to do is we're gonna show it as a single amount and We're gonna show it net of tax. So it's gonna show up basically at the bottom of the income statement and it's gonna be just shown as one item income from discontinued operations net of tax 500, whatever it is, right or loss. We might have a loss from these discontinued operations. And it'll just be shown at the bottom. We're not gonna show all the details those details are left for the footnotes. And on the balance sheet, we're also gonna show it separately these discontinued operations, we're gonna we're gonna show the assets and liabilities separately, but we're not going to net them as a single amount. Will show, hey discontinued assets. And it'll show these assets here and the discontinued liabilities, it'll show them separately from our regular assets and liabilities. Okay. So they're still going to show up there. The main thing you want to know is what a discontinued operation is. It's something that we're not going to continue doing in the future, and that we show it as a single amount net of tax at the bottom of our income statement. So we'll have an example of an income statement at the bottom of the sheet where we'll go over this one more time. All right. In the next video, let's talk about extraordinary II
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Extraordinary Items
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Alright. So when we talk about extraordinary items, these are gonna be extraordinary gains and extraordinary losses. And these come up from items that are unusual and infrequent. Okay, so an extraordinary loss would be from something that's unusual and infrequent. So what would be an example of one? Well, the warehouse caught on fire and we had inventory that was burned up. Right. We're not expecting to have inventory warehouse fires every year. Right. This should be a non regular thing, a non recurring event. And it should be extraordinary. Right, unusual and infrequent. And an example of an extraordinary gain would be a gain on the sale of a discontinued operations. More often, when you talk about extraordinary items, we're talking about an extraordinary loss, but every now and then we'll have an extraordinary gain. This should be unusual and infrequent. Right, when we sell a portion of our business, we're not in the in the business of buying and selling portions of our business. Now, this is gonna be unusual and infrequent. So it would be shown separately. Okay, so just like we said, with discontinued operations, the calculations here are also beyond the scope of this class. Okay, the calculations for extraordinary items. Right, for extraordinary items are also beyond the scope of this class. Um but we're gonna talk about just a few things just like we did with discontinued operations, we have to note that these are non recurring, right? We're not expecting these extraordinary items to happen every year. It's not a persistent activity of the business. We're not in the business of having warehouse fires or selling discontinued operation segments of our business. No, it's non recurring. It should only happen one time on our income statement. And I want to make a note that these extraordinary items in real world, there's so few cases of it. It rarely shows up on any income statement. Okay. And the other thing is just like discontinued operations, we're gonna show them as a single amount net of tax and they're gonna be shown at the bottom below all of our income from continuing operations were trying to separate these things so that they don't muddle up our income statement. We want to show our income statement for what our business is really doing. And then these weird things that investors still want to know what happened, but we don't want it to muddle up our information. So we put it at the bottom separately. Okay, so let's go ahead and peak at this income statement real quick for Verizon communications. And you'll see we've got our operating revenues. Everything we're used to right here, right income from continuing operations. So sorry, we're gonna include a little more there. Everything from here to there. That's all continuing right, This is all regular part of our business. And then notice what we show at the bottom, we show our discontinued operations net of tax and we show an extraordinary item net of tax. Right? So even though there's not so much information here, I'm sure you could look into the notes of the financial statement after we show the financial statements there will be more information about these discontinued operations and these extraordinary items. But notice that we should just show them as one amount for each of them, right? We show an amount for discontinued operations an amount for extraordinary items. And then we get to our net income just like we're used to. Ok, So they're show net of tax and as a single amount. Cool, that's about it. We don't need to go into so much detail about these. Just remember that they're non recurring and they show up here at the bottom of the statement. Let's go ahead and move on to the next video.
