Question

Exercise D12-7 (Essay)

Martha Bennett recently inherited $100,000 from her grandmother and is evaluating several investment opportunities. One company she is looking at is Keating Genomics, a company in the health care industry. To satisfy an assignment in her managerial accounting course, Martha has decided to prepare an analysis of Keating using ratio analysis. During her analysis, she discovers that the company sold its ownership interest in MedRegs in 2016. Keating has reported the results of these operations in the income statement under discontinued operations. A portion of Keating’s adapted income statement (in $000) follows.

		2016		2015
Net income from continuing operations		$899		$4,593
Income (loss) from discontinued operations		4,482		(433)
Net income		$5,381		$4,160

Which income amount should Martha use when she calculates ratios that involve net income? Why?

Answer 1

1.For The Purpose of Evaluating the worthiness of the Company Ratio Analysis plays a key role .

2.Income from Continued Operations is best barometer for analysing the future results of the company,because Income from Continued Operations which is Recurring in nature (Regular Income).On the Other hand Income from Disontinued Operations which are Non Recurring in nature.(Not a Regular Income).

In the Insant case it is better to use Income from Continued Operation of Keating's for Calculating Ratios by Martha.