If you go to a bank to apply for a loan, the bank
will often ask for several years’ tax returns as
evidence of income. Why would the bank ask
for more than the latest tax return? Several years’
tax returns would help the bank evaluate your
normal income. For example, suppose you won
a $50,000 lottery (congratulations!), increasing
your taxable income for that year to $75,000, in-
cluding $25,000 income from employment.
Upon review of several years’ tax returns, the
bank would be able to determine that the lot-
tery year contained an unusual event that
would not likely be repeated in future years.
That is, the normal income is closer to $25,000
per year, even though actual income for one
year was $75,000. As a result, the bank may dis-
count the $50,000 lottery proceeds when esti-
mating your future debt repayment capacity.
In the same way, companies must identify
unusual items of income or expense, so as to
provide financial statement users insight to
normal earnings. Thus, defining and reporting
earnings is an important part of the financial
reporting process. As a user of financial state-
ments, you will need to evaluate the reported
earnings numbers to understand the earning
power of the company.
For example, eBay Inc., the online auction
company, has earnings power from over
125 million registered users that host up to 350
million listings for over 45,000 different
categories. Over 10,000 full-time traders operate
on eBay. Over 21 million items are for sale at
any one time, and the site was visited by over
30% of all active Internet users in a recent month.
Clearly, eBay is an Internet retail powerhouse.
These normal aspects of eBay are part of its
ongoing operations. Infrequent or unusual
events should be separately disclosed so that
the normal earnings trends can be estimated.
In this chapter, we will discuss a number of
special topics that impact earnings disclosure.
In addition, we will discuss investment report-
ing issues.Sources:Adapted from David Sheets, “Fact Is Really Much
Better Than Fiction in Rise of eBay” Everyday Magazine, June
26, 2002; Kara Swisher, “Boom Town: eBay Founder Is
Bidding on a Sense of Community—Omidyar Plans to Use
Wealth to Apply His Firm’s Model to the Real Global Village,”
The Wall Street Journal, October 29, 2001, p. B-1; and “How
eBay Made Net Profit,” The Guardian, October 16, 2004.eBay Inc.
© PR NEWSPHOTO/EBAY INC. (AP WIDE WORLD PHOTO)