42 Understanding the Numbers
plant closing costs, record-store closing costs, write-down of U.K. assets, the
loss on sale of equity investments, and the preopening expenses.
There will usually be other nonrecurring items lurking in other statements
or footnotes. Note the approximately $12-million change in the Other expense
(income) net balance for the year ending January 2, 1999, compared to the year
ending January 3, 1998. Also, there must be something unusual about income
taxes in the year ending January 3, 1998. The effective tax rate ($5,586,000 di-
vided by $30,283,000) is only about 18%, well below the 35% statutory federal
tax rate for large companies. By contrast, the effective tax rate ($38,407,000 di-
vided by $57,092,000) for the year ending January 2, 1999, is about 67%.
Nonrecurring Items Located in Income
from Continuing Operations
Whether a single- or multistep format is used, the composition of income from
continuing operations is the same. It includes all items of revenue, gain, ex-
pense, and loss except those (1) identified with discontinued operations, (2)
meeting the definition of extraordinary items, and (3) resulting from the cu-
mulative effect of changes in accounting principles. Because income from con-
tinuing operations excludes only these three items, it follows that all other
nonrecurring items of revenues or gains and expenses or losses are included in
this key profit subtotal.
EXHIBIT 2.5 Consolidated multi-step statements of earnings:
Toys “R” Us Inc. (in millions).
Year Ended
Jan. 31 Jan. 30 Jan. 29
1998 1999 2000
Net sales $11,038 $11,170 $11,862
Cost of sales 7,710 8,191 8,321
Gross Profit 3,328 2,979 3,541
Selling, general and administrative expenses 2,231 2,443 2,743
Depreciation, amortization and asset write-offs 253 255 278
Restructuring charge — 294 —
Total Operating Expenses 2,484 2,992 3,021
Operating Income/(Loss) 844 (13) 520
Interest expense 85 102 91
Interest and other income (13) (9) (11)
Interest Expense, Net 72 93 80
Earnings/(loss) before income taxes 772 (106) 440
Income taxes 282 26 161
Net earnings/(loss) $ 490 $ (132) $ 279
Note:Per share amounts omitted.
SOURCE: Toys “R” Us Inc., annual report, January 2000, 25.