Question

It is December 31, 2012, and the program at Monsters, Inc. is crashing. Instead of producing an income statement, it keeps printing an alphabetical list of accounts:

Administrative expenses $215,000

Cost of goods sold 408,500

Extraordinary casualty loss 70,000

Income taxes 54,900

Loss on inventory write-down (nonrecurring) 13,000

Gain on foreign currency translation 19,500

Loss from discontinued operations 30,000

Sales 945,000

Selling expenses 145,000

1. James Gates, the owner of Monsters Inc firm, is confused about the accounting treatment for irregular items on the income statement and needs you to explain a couple things to him:

- Why GAAP requires special treatment for irregular items.

- How to determine whether an item is unusual

Answer 1

Why GAAP requires special treatment for irregular items?

Irregular items shall be disclosed separately in the income Statement. It shall not be presented or merged with the regular or normal items.

The users of the financial statement must be informed well about the normal operations as well as the irregular items. Distinguishing these items, will enable the users in informed decision making.

Also, there are specific ratios which needs to be computed which excludes irrelgular items, such as Economic Value Added.

Hence, GAAP requires special treatment for irregular items.

How to determine whether an item is unusual?

The unusual item may be recognized based on follwing factors-

• Regularity
• Cost involved
• Frequency of occurrence