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2. Why is it necessary to separate the irregular items in the income statement? How are extraordinary items different from some other irregular items that you occasionally see on a corporate income statement (e.g., items such as restructuring costs, currency gain on foreign exchange transactions, etc.)? According to accounting standard it is necessary to present irregular items in the income statement separately. Otherwise they can make confusion to user of income statement. Extraordinary items are caused by outsiders especially terror, weather and government policy. Usually other irregular items which are discontinued operation they depend on company’s probable loss and decision of management. What is an extraordinary item per GAAP…show more content…
If earnings are higher than free cash flow, it means company is avoiding reporting some of their particular expenses, which is a sign of lower quality earning. Some companies cut off their controllable cost for specific period of time when sales decline. As an example Research and Development cost can be shifted down. Shifting of discretionary costs over the period may not be a good sign for quality of earning. But still company may have good reason. http://www.valueline.com/Tools/Educational_Articles/Stocks/Assessing_Earnings_Quality__Potential_Warning_Signs.aspx How would you relate quality of earnings to the concepts of permanent earnings and transitory earnings? What do these terms mean? Quality of earning is related with concepts of permanent and transitory earning several ways, to measure a quality earning we should look at permanent earning, as territories are not happening continuously we should avoid this earning. But all the earning in income statement before transitory earning may not be permanent, when the earnings are mislead. Permanent earning means, the regular earnings from continuing operation which usually reported in income statement before extraordinary, discontinued operation, and accounting rules change earnings. Transitory earning are earnings which are exceptional and not going to happen in future very often and unpredictable. These earning are classified into
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