A public company is preparing its annual financial statements. Which of the following items should be disclosed as a separate line item on the income statement, net of tax?
- AIncome from discontinued operations.
- BGain or loss from the sale of property, plant, and equipment.
- CUnusual and infrequent gain from the sale of an investment property.
- DRestructuring costs related to a plant closure.
Show answer & explanationAnswer & explanation
Correct answer: A. Income from discontinued operations.
Under U.S. GAAP, discontinued operations are reported as a separate line item on the income statement, net of tax, below income from continuing operations. Other items like restructuring costs, gains/losses from PPE sales, and unusual/infrequent gains/losses are typically reported within continuing operations, though they may be presented as separate line items before tax or disclosed in the notes.
Why the other options are wrong
- B. Gains or losses from PPE sales are included in income from continuing operations, usually as part of other income/expense.
- C. Unusual and infrequent items are reported as part of income from continuing operations, typically in a separate line item before tax, but not net of tax below continuing operations.
- D. Restructuring costs are typically reported within continuing operations before tax, though often separately identified.
Discontinued Operations Reporting
Discontinued operations represent activities of a component of an entity that either has been disposed of or is classified as held for sale, and that represents a strategic shift. They are reported separately on the income statement, net of tax, after income from continuing operations.
- Component disposed of or held for sale
- Represents a strategic shift
- Reported net of tax
- Appears after income from continuing operations
Memory trick: Income's tiers: Continuing first, then Discontinued's net, and OCI for what's not yet met.