Financial Accounting: An Integrated Statements Approach, 2nd Edition

Fuhlmer, Inc., is in the process of preparing its annual financial statements. Fuhlmer, Inc., is a

large citrus grower located in central Florida. The following is a discussion between Jason Kirk,

the controller, and April Gwinn, the chief executive officer and president of Fuhlmer, Inc.

April:Jason, I’ve got a question about your rough draft of this year’s financial statement.

Jason:Sure, April. What’s your question?

April:Well, your draft shows a net loss of $750,000.

Jason:That’s right. We’d have had a profit, except for this year’s frost damage. I figured that

the frost destroyed over 30% of our crop. We had a good year otherwise.

April:That’s my concern. I estimated that if we eliminate the frost damage, we’d show a profit

of...let’s see...about $250,000.

Jason:That sounds about right.

April:This income statement seems misleading. Why can’t we show the loss on the frost dam-

age separately? That way the bank and our outside investors will be able to see that this

year’s loss is just temporary. I’d hate to get them upset over nothing.

Jason:Maybe we can do something. I recall from my accounting courses something about

showing unusual items separately. Let’s see...yes, I remember. They’re called extraordi-

nary items.

April:Well, we haven’t had any frost damage in over five years. This year’s damage is cer-

tainly extraordinary. Let’s do it!

Discuss the appropriateness of revising Fuhlmer, Inc.’s income statement to report the

frost damage separately as an extraordinary item.

The two-year comparative income statements and a note disclosure for Fleet Shoes, Inc., were

as follows:

576 Chapter 12 Special Income and Investment Reporting Issues

Activity 12-3

Reporting extraordinary item

Activity 12-4

Special charges analysis

Activity 12-5

Extraordinary items and

discontinued operations

2006 2007

Sales $ 430,000 $ 510,000

Cost of merchandise sold 193,500 224,400

Gross profit $ 236,500 $ 285,600

Selling and administrative expenses (107,500) (122,400)

Loss on fixed asset impairment (102,000)

Income from operations $ 129,000 $ 61,200

Income tax expense 51,600 24,480

Net income $ 77,400 $ 36,720

Note:A fixed asset impairment of $102,000 was recognized in 2007 as the result of abandoning an order

management software system. The system project was started in early 2006 and ran into significant delays

and performance problems throughout 2007. It was determined that there was no incremental benefit

from completing the system. Thus, the accumulated costs associated with the system were written off.

Fleet Shoes, Inc.

Income Statement

For the Years Ended December 31, 2006 and 2007

1. Construct a vertical analysis for 2006 and 2007 by determining for each line item its ratio as
   a percent of sales.


2. Interpret the performance of the company in 2007.

In groups of three or four students, search company annual reports, news releases, or the

Internet for extraordinary items and announcements of discontinued operations. Identify the

most unusual extraordinary item in your group. Also, select a discontinued operation of a well-

known company that might be familiar to other students or might interest them.

Prepare a brief analysis of the earnings per share impact of both the extraordinary item and

the discontinued operation. Estimate the potentialimpact on the company’s market price by

multiplying the current price-earnings ratio by the earnings per share amount of each item.