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Continuing Operations vs. Discontinued Operations

Investing Lesson 4 - Analyzing an Income Statement

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discontinued operations continuing operationgs going out of business

When a company closes, sells, or divests a division or business line, accounting rules require that investors be notified by separating the information out in a special category called discontinued operations.

Continuing / Ongoing Operations vs. Discontinued Operations
In the 1990's, Viacom, owner of MTV, VH1, and Nickelodeon, purchased Paramount Studios. To pay for the acquisition, Viacom took on a large amount of debt. The company's Chairman, Sumner Redstone, began selling assets and businesses the company owned in order to help pay down this debt.

Simon & Schuster, a major book publisher, was one of the businesses Viacom decided to let go, ultimately selling it to British media group Pearson PLC for $4.6 billion dollars. How did the deal affect the company's revenue and earnings?

This is where discontinued and ongoing operations come to the rescue. As soon as Viacom sold Simon, it had a pile of cash from the buyer. However, it lost all of the revenue and profit the publisher generated. Viacom's management must somehow warn investors, "Hey, Simon generated [X amount] of our profit and revenue. Since we no longer own the business, you can't plan on us earning this revenue / profit next year". To do that, the Viacom puts an entry on their income statement called "Discontinued Operations". This shows investors money that was earned from businesses that won't be part of the company's holdings for very much longer.

Continuing operations are the businesses the company expects to be engaged in for the foreseeable future.

Net Income from Continuing Operations
After all of these expenses are deducted, the investor is left with a figure called net income from continuing operations. This is a calculation of the profit generated by continuing operations during the period covered by the income statement.

Net Income from Discontinued Operations
The amount shown on the income statement under discontinued operations is the profit made during the period from the businesses that will not be a part of the company in the future.

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This page is part of Investing Lesson 4 - How to Read an Income Statement. To go back to the beginning, see the Table of Contents.

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