46 Understanding the Numbers
classifying these nonrecurring gains within operating income to prevent share-
holders’ unrealistic expectations for earnings in subsequent periods. It is com-
mon to see foreign-currency gains and losses classified below operating
income. This is somewhat difficult to rationalize because currency exposure
is an integral part of operations when a firm does business with foreign cus-
tomers and /or has foreign operations.
The operating income subtotal should measure the basic profitability of a
firm’s operations. It is far from a net earnings number because its location in
the income statement is above a number of other nonoperating revenues, gains,
expenses, and losses, as well as interest charges and income taxes. Clearly, the
range and complexity of nonrecurring items create difficult judgment calls
in implementing this concept of operating income. Management may use this
f lexibility to manage the operating income number. That is, the classification
of items either inside or outside operating income could be inf luenced by the
goal of maintaining stable growth in this key performance measure.
Some of the items in Exhibit 2.7 would seem to have been equally at home
within the operating income section. An environmental reserve (Champion En-
terprises) appears to be closely tied to operations, as are the workforce reduc-
tion charges, a common element of restructuring charges (Imperial Holly); the
insurance settlement from the tanker grounding (Freeport-McMoRan); and
business interruption insurance (Pollo Tropical).
Nonrecurring Items Located below Income from
Continuing Operations
The region in the income statement below income from continuing operations
has a standard organization and is the same for both the single- and multistep
income statement. This format is outlined in Exhibit 2.8. The income statement
of AK Steel Holding Corporation, shown in Exhibit 2.9, illustrates this format.
Each of the special line items—that is, discontinued operations, extraordinary
EXHIBIT 2.8 Income statement format with
special items.
Income from continuing operations $000
Discontinued operations 000
Extraordinary items 000
Cumulative effect of changes in accounting principles 000
Net income 000
Other comprehensive income 000
Comprehensive income $000SOURCES: Key guidance is found in Accounting Principles Board Opinion
No. 30, Repor ting the Results of Operations(New York: AICPA, June 1973)
and Statement of Financial Accounting Standards (SFAS), No. 130, Repor t-
ing Comprehensive Income(Nor walk, CT: FASB, June 1997).