SUMMARY TO ANALYZING BUSINESS EARNINGS




An estimation of the sustainable portion of earnings should be the centerpiece of analyzing business earnings. This task has become a far greater challenge over the past decade as the number of nonrecurring items has increased dramatically. This explosion has been driven by corporate reorganizations and associated activities. Some of the labels attached to these producers of nonrecurring items are restructuring, rightsizing, downsizing, reengineering, redeployment, repositioning, reorganizing, rationalizing, and realignment. The following are some key points for the reader to consider:

• An earnings series from which nonrecurring items have been purged is essential in order to both evaluate current trends in operating performance and make projections of future results.

• The identification and measurement of nonrecurring items will typically require the exercise of judgment.

• There are no agreed-upon definitions of nonrecurring items as part of GAAP. Moreover, a variety of labels are used beyond the term nonrecurring and they include special, unusual, nonoperating, and noncore.

Topics You May Be Interested In
Financial Statements: Who Uses Them And Why The Process Of Identifying Nonrecurring Items
Financial Statement Format Nonrecurring Items In The Statement Of Cash Flows
How To Analyze Financial Statements Nonrecurring Items In The Inventory Disclosures Of Lifo Firms
Introduction To Analyzing Business Earnings Nonrecurring Items In The Other Income And Expense Note
The Nature Of Nonrecurring Items Nonrecurring Items In Other Selected Notes

• It is common to treat items as nonrecurring even though they may appear with some regularity in the income statement. However, these items are usually very irregular in terms of their amount as well as whether they are revenues/gains or expenses/losses.

• The key question to pose in making the nonrecurring judgment is: Will underlying trends in operating performance be obscured if the item remains in earnings?

• Many material nonrecurring items will be separately disclosed on the face of the income statement. However, a substantial number will be disclosed in other statements and locations. It is typically necessary to extend the search for nonrecurring items well beyond the income statement.

• In response to reductions in the time available for a whole range of important activities, an efficient and abbreviated search sequence is presented in the chapter and illustrated with a comprehensive case example.

Topics You May Be Interested In
What Are Financial Statements? A Case Study Combining Financial Ratios
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Financial Statements: Who Uses Them And Why Introduction To Analyzing Business Earnings
Financial Statement Format The Process Of Identifying Nonrecurring Items
Using Financial Ratios Nonrecurring Items In The Inventory Disclosures Of Lifo Firms

While a comprehensive review of all financial reporting is the gold standard, reliable information on sustainable earnings can typically be developed while employing only a subset of reported financial information.



Frequently Asked Questions

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Ans: The construction of an SEB worksheet always requires a judgment call. One could, of course, avoid all materiality judgments by simply recording all nonrecurring items without regard to their materiality. However, the classification of items as nonrecurring, as well as on occasion their measurement, calls for varying degrees of judgment. Some examples of Baker Hughes items that required the exercise of judgment, either in terms of classification or measurement, are discussed next. view more..
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Ans: The nonrecurring items located in the Baker Hughes annual report are enumerated in the completed SEB worksheet in Exhibit 2.35. Each of the nonrecurring items is recorded on the SEB worksheet. When an item is disclosed for the first, second, third, or fourth time, it is designated by a corresponding superscript view more..
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Ans: This case example of using the SEB worksheet is based on the 1997 annual report of Baker Hughes Inc. and its results for 1995 to 1997. The income statement, statement of cash flows, management’s discussion and analysis of results of operations (MD&A), and selected notes are in Exhibits 2.27 through 2.34. Further, to reinforce the objective of efficiency in financial analysis, we adhere to the search sequence outlined in Exhibit 2.3. view more..
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Ans: An estimation of the sustainable portion of earnings should be the centerpiece of analyzing business earnings. This task has become a far greater challenge over the past decade as the number of nonrecurring items has increased dramatically. This explosion has been driven by corporate reorganizations and associated activities. Some of the labels attached to these producers of nonrecurring items are restructuring, rightsizing, downsizing, reengineering, redeployment, repositioning, reorganizing, rationalizing, and realignment. view more..
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Ans: Abigail Peabody was a very well-known nature photographer. Over the years she had had a number of best-sellers, and her books adorned the coffee tables of many households worldwide. On this particular day she was contemplating her golden years, which were fast approaching. In particular she was reviewing her year-end investment report and wondering why she was not better prepared. After all, she had been featured in the Sunday New York Times book section, had discussed her works with Martha Stewart, and had been the keynote speaker at the Audubon Society’s annual fund-raiser. She knew it was not her investment advisers’ fault. Their performance over the past years had been better than many of the market indixes. She wondered if she was just a poor businessperson. view more..




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