Special Items: If an item is unusual in nature or infrequent in occurrence, but not both, and if it is material, then it must be shown separately on the income statement (usually as part of income from continuing operations). This special item will not be reported net of tax. Extraordinary: These are items that are material and are both infrequent in nature and unusual in occurrence. Extraordinary items should be very rare. Appear after net income from discontinued operations and before the effect of changes in accounting principles Discontinued Operations: A component of a business is defined as a segment for which operations and cash flows can be distinguished both operationally and for financial reporting purposes. It has to be sold in full. Check of impairment of segment if not sold off by the end of the year. Reported net of tax and must restate all previous reports. Asset Impairment: check undiscounted cf and reduce to fair value. Cannot reverse in following years. Usually will be included in operating income and needs to be separate and clear. CF Statement
Why is it important? BK, manipulation, DCF. A lot use FCF (many def, a good one is ops minus inv in productive assets). Dividends and interest get wrong classification that must be accounting for. (move interest expense net of tax benefit) Reasons for differences in BS changes vs cash flow numbers: write-offs, noncash transactions, translation adjustments, acquisitions Ways to manipulate: securitization via SPEs, exchanges listed as sales and purchases. Revenue and Expense Recognition
Realized and earned: Persuasive evidence of an arrangement exists; Delivery has occurred or services have been rendered; The seller’s price to the buyer is fixed or determinable; Collectibility is reasonably assured.
Gross vs net: acts as a principal in the transaction; takes title to the products; has risks and rewards of ownership, such as the risk of loss for collection, delivery, or...