72 Understanding the Numbers
come as no surprise that most firms have elected this third option. Firms have
an aversion to including items in the income statement that have the potential
to increase the volatility of earnings. Hence, given the option, firms can and
did choose to avoid the income statement.^46
There is scant evidence at this time that statement users pay any attention
to other comprehensive income. Companies do not include other comprehensive
income in discussions of their earnings performance, nor does the financial press
comment on it when earnings are announced. Earnings per share statistics do
not incorporate other comprehensive income. Other comprehensive income is
not currently part of earnings analysis. Hence, we consider it no further. Atti-
tudes may change, however, about the usefulness of other comprehensive in-
come as analysts and others become more familiar with these relatively new
disclosures. It seems worthwhile to at least be made aware of these disclosures as
part of a thorough treatment of income statement structure and content.
With the structure of the income statement and relevant GAAP now re-
viewed, the nature of nonrecurring items considered, and methods of locating
nonrecurring items outlined and illustrated, we can turn to the task of devel-
oping the sustainable earnings series.
SUMMARIZING NONRECURRING ITEMS AND
DETERMINING SUSTAINABLE EARNINGS
The work to this point has laid out important background but is not complete.
Still required is a device to assist in summarizing information discovered on
nonrecurring items so that new measures of sustainable earnings can be devel-
oped. We devote the balance of this chapter to introducing a worksheet
specially designed to summarize nonrecurring items and illustrating its devel-
opment and interpretation in a case study.^47
THE SUSTAINABLE EARNINGS WORKSHEET
The sustainable earnings worksheet is shown in Exhibit 2.26. Detailed instruc-
tions on completing the worksheet follow:
- Net income or loss is recorded on the top line of the worksheet.
- All identified items of nonrecurring expense or loss, which were included
in the income statement on a pretax basis, are recorded on the “add” lines
provided. Where a prelabeled line is not listed in the worksheet, a de-
scriptive phrase should be recorded on one of the “other” lines and the
amounts recorded there. In practice, the process of locating nonrecurring
items and recording them on the worksheet would take place at the same
time. However, effective use of the worksheet calls for the background
provided earlier in the chapter. This explains the separation of these steps
in this chapter.