More of this Feature • Introduction • Income Statement • Revenue / sales • Cost of Goods Sold • Gross profit • Gross margin • The first three lines • Operating Expenses • R&D Expense • SG&A Expense • Goodwill Charges • Extraordinary Events • Accounting for extraordinary events • Oper. income/margin • Interest income and expense • Interest coverage ratio • Depreciation expense • Accum. Depreciation • Straight-line Method • Accelerated and Sum of the Years' Digits Method • Dbl Declining Balance • Comparing Depr. Mths • EBITDA • Income taxes • Minority Interests - cost, equity, and consolidated methods • Unreported earnings • Continuing operations • Accounting changes • Preferred dividends • Net income applicable to common shares • Net profit margin • Basic vs. Diluted EPS • Hiding share dilution • Share repurchases • Return on Equity- ROE • Asset turnover • Return on Assets- ROA • Projecting earnings • Formulas & Calculations • Putting it together • Segment 2

Related Resources • Investing Lesson 1 • Investing Lesson 2 • Investing Lesson 3 • More Lessons

From Other Guides • Frugal Living • Small ways to control expenses

Elsewhere on the Web • SG&A Expense • Extraordinary Item • Nonrecurring Charge

Non-Recurring and Extraordinary Items or Events
In the unpredictable world of business, events will arise that are not expected and most likely not occur again. These one-time events are separated on the income statement and classified as either non-recurring or extraordinary. This allows investors to more accurately predict future earnings. If, for instance, you were considering purchasing a gas station, you would base your valuation on the earning power of the business, ignoring one-time costs such as replacing the station’s windows after a thunderstorm. Likewise, if the owner of the station had sold a vintage Coke machine for $17,000 the year before, you would not include it in your valuation because you had no reason to expect that profit would be realized again in the future.

What is the difference between non-recurring and extraordinary events? A nonrecurring charge is a one-time charge that the company doesn’t expect to encounter again. An extraordinary item is an event that materially* affected a company’s finance and needs to be thoroughly explained in the annual report or SEC filings. Extraordinary events can include costs associated with a merger, or the expense of implementing a new production system [as McDonald’s did in the late 1990’s with the Made for You food preparation system].

Non-recurring items are recorded under operating expenses, while extraordinary items are listed after the net line, after-tax.

*The term material is not specific. It generally refers to anything that affects a company in a meaningful and significant way. Some investors try to put a number on the figure, saying an event is material if it causes a change of 5% or more in the company’s finances.

Next page > Accounting for Extraordinary Events in your Analysis> << back, 8, 9, 10, 11, 12, 13, 14, more >>