June 9, 2014
Ethics Case 4 -7
Income statement presentation of unusual loss
Financial statements are very important for many participants in the financing reporting process. High-quality financing reporting is necessary to investors and creditors in decision-making process. Their decisions and judgments depend on accuracy of information presented in those statements. For example, investors try to predict future performance based on the company’s current earnings. They want to invest in a company that is profitable. Misleading information in financial statements can have a negative impact on their decision. Unfortunately, some managers try to manipulate financial ...view middle of the document...
Discontinued operations and extraordinary items are not classified as continuing operations. The company controller is trying to avoid including $10 million expense in continuing operation because that will affect the executives’ bonuses and the company’s stock price as well.
Jim Dietz suggests to the chief executive officer to classify this huge recall as an extraordinary item. He tries to justify his position to the chief executive officer by explaining that even though recalls do occur in their industry, and they had them before, this one was of a great magnitude. He also points out that the Cranor Corporation has already fixed the design flaw and upgraded their quality control procedure.
Extraordinary items represent a company’s losses and gains that are not generated from continuing operations. The extraordinary items are reported separately in the income statement to clarify which items are not related to the operational and financial results of the business. They are presented separately below income from discontinued operations, along with disclosure of the nature of the items, and net of related income taxes (Spiceland, Sepe, & Nelson, 2013, p. 189). To be considered and classified as an extraordinary item, an event has to be material, and both unusual in nature and infrequent in incurrence (Spiceland, Sepe, & Nelson, 2013, p. 188). It is very unlikely that the event will happen again in near future. However, both criteria have to be considered based on the environment in which the organization operates (Massoud, Web. 9 June 2014). This means that an event that is extraordinary for one company, it does not have to be extraordinary for another one. For example, a damage from a hurricane would not be considered an extraordinary item if hurricanes are common in the area where a company is located. Similarly, some events that are either unusual or infrequent, but not both, cannot be considered extraordinary, for instance, the loss of a major customer, the effects of a strike, and the adjustment of accruals on long-term contracts (Spiceland, Sepe, & Nelson, 2013, p....