within one year or the normal operating cycle, whichever is longer. Current assets, usually presented in order of liquidity, include cash(and cash equivalents), temporary investments in marketable securities, receivables, inventories, and prepaid items. Temporary investments in marketable securities are listed at their market(fair) value; receivables are listed at the net realizable value; inventories are listed at the lower of their cost or market value; and prepaid items are shown at historical cost, less any amount used up Current liabilities are obligations that are expected to be liquidated within I year or the operating cycle (if longer) through the use of current assets or the creation of other current liabilities. Accounts and short-term notes payable, wages payable, interest payable, the current portion of long-term debt, and deferred revenues(collections for goods and services not yet provided)are examples of current liabilities Each is listed on the balance sheet at the amount owed(historical proceeds). The difference between a company's current assets and its current liabilities is called working capital. A company's working capital is a measure of the short-run liquidity of the company Long-term investments are investments that the company plans to hold for more than I year or its operating cycle, if longer. Examples are investments in equity securities(such as capital stock of another firm)and debt securities(such as bonds); land, buildings, and equipment held for future use(such as expansion); special cash funds held for future use, and non-current financial instruments such as stock options The property, plant, and equipment section of a company's balance sheet includes all tangible assets (fixed assets) used in its operations, such as land, buildings, machinery, furniture, and natural resources Except for land, these assets are either depreciated, amortized(for leased assets), or depleted (for natural esource assets). For depreciable assets, a contra-asset account(such as accumulated depreciation)is deducted from the original asset cost in order to display both the historical cost and the book value(present undepreciated cost) Intangible assets are noncurrent economic resources, such as patents, copyrights, trademarks, franchises, computer software costs, goodwill, and organization costs that are used in the operations but that have no physical existence. The value of this type of asset lies in the special right of the company to Its use. These assets are recorded at historical cost. Intangible assets with finite useful lives(e.g, patents) are amortized over their useful lives and reported on the balance sheet at book value. Intangible assets with indefinite lives(e.g, copyrights) and goodwill are not amortized but are reviewed for impairment annually They are reported at their historical cost or, if impaired, at their lower fair value Most business assets will fit into one of the categories already described. Sometimes a balance sheet will have a section labeled"Other Assets"or "Deferred Charges" for assets that cannot be classified otherwise. Because of their vagueness such classifications, as well as"Other Liabilities, " should rarely be Long-term liabilities(noncurrent liabilities) are obligations that are not expected to require the use of current assets or not expected to create current liabilities within I year or the operating cycle, if longer Examples are long-term notes payable, obligations under capital lease contracts, mortgages accrued pension costs, and bonds payable. A bond obligation is another example of a long-term liability Bonds(sometimes called debentures)are often sold for more than face value(at a premium) or less than face value(at a discount). On a balance sheet, the bond obligation is reported at its book value. The book value is the face value of the obligation plus any unamortized premium or less any unamortized discount 4.2 Conceptual guidelines for reporting assets and liabilities Assets and liabilities may also be further classified according to(a) their expected function in the
- 10- within one year or the normal operating cycle, whichever is longer. Current assets, usually presented in order of liquidity, include cash (and cash equivalents), temporary investments in marketable securities, receivables, inventories, and prepaid items. Temporary investments in marketable securities are listed at their market (fair) value; receivables are listed at the net realizable value; inventories are listed at the lower of their cost or market value; and prepaid items are shown at historical cost, less any amount used up. Current liabilities are obligations that are expected to be liquidated within 1 year or the operating cycle (if longer) through the use of current assets or the creation of other current liabilities. Accounts and short-term notes payable, wages payable, interest payable, the current portion of long-term debt, and deferred revenues (collections for goods and services not yet provided) are examples of current liabilities. Each is listed on the balance sheet at the amount owed (historical proceeds). The difference between a company's current assets and its current liabilities is called working capital. A company's working capital is a measure of the short-run liquidity of the company. Long-term investments are investments that the company plans to hold for more than 1 year or its operating cycle, if longer. Examples are investments in equity securities (such as capital stock of another firm) and debt securities (such as bonds); land, buildings, and equipment held for future use (such as expansion); special cash funds held for future use; and non-current financial instruments such as stock options. The property, plant, and equipment section of a company's balance sheet includes all tangible assets (fixed assets) used in its operations, such as land, buildings, machinery, furniture, and natural resources. Except for land, these assets are either depreciated, amortized (for leased assets), or depleted (for natural resource assets). For depreciable assets, a contra-asset account (such as accumulated depreciation) is deducted from the original asset cost in order to display both the historical cost and the book value (present undepreciated cost). Intangible assets are noncurrent economic resources, such as patents, copyrights, trademarks, franchises, computer software costs, goodwill, and organization costs that are used in the operations but that have no physical existence. The value of this type of asset lies in the special right of the company to its use. These assets are recorded at historical cost. Intangible assets with finite useful lives (e.g., patents) are amortized over their useful lives and reported on the balance sheet at book value. Intangible assets with indefinite lives (e.g., copyrights) and goodwill are not amortized but are reviewed for impairment annually. They are reported at their historical cost or, if impaired, at their lower fair value. Most business assets will fit into one of the categories already described. Sometimes a balance sheet will have a section labeled "Other Assets" or "Deferred Charges" for assets that cannot be classified otherwise. Because of their vagueness such classifications, as well as "Other Liabilities," should rarely be used. Long-term liabilities (noncurrent liabilities) are obligations that are not expected to require the use of current assets or not expected to create current liabilities within 1 year or the operating cycle, if longer. Examples are long-term notes payable, obligations under capital lease contracts, mortgages payable, accrued pension costs, and bonds payable. A bond obligation is another example of a long-term liability. Bonds (sometimes called debentures) are often sold for more than face value (at a premium) or less than face value (at a discount). On a balance sheet, the bond obligation is reported at its book value. The book value is the face value of the obligation plus any unamortized premium or less any unamortized discount. 4. 2 Conceptual guidelines for reporting assets and liabilities Assets and liabilities may also be further classified according to (a) their expected function in the
central operations of the company (ie, held for resale or used in production),(b)the method of valuation (i. e, net realizable value vs. historical cost ),(c)their financial flexibility (i. e, used in operations vs. held for investment)or (d) the extent to which they result from usual or recurring activities vs. unusual nonrecurring activities(i.e core vs. noncore). These subcategories are intended to enhance the external usefulness of the financial statement information 4.3 Stockholders' equity classifications The stockholders' equity section of a corporations bal ance sheet consists of three main categories contributed capital, retained earnings, and accumulated other comprehensive income. Contributed capital represents amounts owners have invested in the business. Contributed capital is separated into capital stock which reports the legal capital or par value of the stock, and additional paid-in capital which reports the difference between the par value and the market value when issued. Corporations may issue two types of capital stock, common and preferred, each of which has distinguishing characteristics. Retained earnings represents the cumulative amount of undistributed past net income kept in the business for operating purposes or for purposes of expansion. Accumulated other comprehensive income includes the total amount of items such as unrealized increases(gains)or decreases(losses)in the market(fair)value of investments in available-for-sale securities] of other comprehensive income 5. Limitations of the balance sheet Instructor should also inspire students to think about the limitations of the balance sheet, enhancing their understanding of balance sheet 6. Statement of changes in stockholders'equity FASB Statement of Concepts No. 6 suggests that financial statements include information about(a) investments by owners, or increases in equity from transfers to the company of assets and other valuable items by the owners, and(b)distribution to owners, or decreases in equity from transfers by the company of assets and other valuable items to the ov To disclos on as well as the retained earnings changes, a statement of changes in stockholders'equity which discloses changes in all of the quity accounts is often presented as a financial statement I Other disclosure issues Since all of the relevant financial information pertaining to a company's activities cannot be disclosed directly in the body of the financial statements, additional disclosures are made in the notes to the company's financial statements. Significant disclosure issues include Summary of accounting policies. APB opinion No. 22 requires that a company include a description of all significant accounting policies as an integral part of its financial statements Fair value and risk of financial instruments. FASB Statement No. 107 requires a company to disclose he fair value of all its financial instruments(both assets and liabilities), whether recognized or not on the balance sheet. The Statement also requires a company to disclose all significant concentrations of credit risk due to its financial instruments. FASB Statement No. 133 requires a company to recognize all derivative financial instruments(e.g, stock options) as either assets or liabilities on the balance sheet, and to measure these items at fair value. The Statement also requires a company to disclose other information (e.g, the types of derivative instruments held, objectives in holding the instruments, and strategies for achieving these objectives), as well as the company's risk management policy in regard to each type of Instrument Contingent liabilities and assets. a company discloses contingent liabilities(loss contingencies)in the notes to its financial statements if there is only a reasonable possibility that the loss may have been incurred or if the amount of the loss cannot be reasonably estimated. If it is probable that the loss has been
- 11- central operations of the company (i.e., held for resale or used in production), (b) the method of valuation (i.e., net realizable value vs. historical cost), (c) their financial flexibility (i.e., used in operations vs. held for investment) or (d) the extent to which they result from usual or recurring activities vs. unusual or nonrecurring activities (i.e. core vs. noncore). These subcategories are intended to enhance the external usefulness of the financial statement information. 4. 3 Stockholders' equity classifications The stockholders' equity section of a corporation's balance sheet consists of three main categories: contributed capital, retained earnings, and accumulated other comprehensive income. Contributed capital represents amounts owners have invested in the business. Contributed capital is separated into capital stock which reports the legal capital or par value of the stock, and additional paid-in capital which reports the difference between the par value and the market value when issued. Corporations may issue two types of capital stock, common and preferred, each of which has distinguishing characteristics. Retained earnings represents the cumulative amount of undistributed past net income kept in the business for operating purposes or for purposes of expansion. Accumulated other comprehensive income includes the total amount of items [such as unrealized increases (gains) or decreases (losses) in the market (fair) value of investments in available-for-sale securities] of other comprehensive income. 5. Limitations of the balance sheet Instructor should also inspire students to think about the limitations of the balance sheet, enhancing their understanding of balance sheet. 6. Statement of changes in stockholders' equity FASB Statement of Concepts No. 6 suggests that financial statements include information about (a) investments by owners, or increases in equity from transfers to the company of assets and other valuable items by the owners, and (b) distribution to owners, or decreases in equity from transfers by the company of assets and other valuable items to the owners. To disclose this information as well as the retained earnings changes, a statement of changes in stockholders' equity which discloses changes in all of the equity accounts is often presented as a financial statement. I Other disclosure issues Since all of the relevant financial information pertaining to a company's activities cannot be disclosed directly in the body of the financial statements, additional disclosures are made in the notes to the company's financial statements. Significant disclosure issues include: Summary of accounting policies. APB opinion No. 22 requires that a company include a description of all significant accounting policies as an integral part of its financial statements. Fair value and risk of financial instruments. FASB Statement No. 107 requires a company to disclose the fair value of all its financial instruments (both assets and liabilities), whether recognized or not on the balance sheet. The Statement also requires a company to disclose all significant concentrations of credit risk due to its financial instruments. FASB Statement No. 133 requires a company to recognize all derivative financial instruments (e.g., stock options) as either assets or liabilities on the balance sheet, and to measure these items at fair value. The Statement also requires a company to disclose other information (e.g., the types of derivative instruments held, objectives in holding the instruments, and strategies for achieving these objectives), as well as the company's risk management policy in regard to each type of instrument. Contingent liabilities and assets. A company discloses contingent liabilities (loss contingencies) in the notes to its financial statements if there is only a reasonable possibility that the loss may have been incurred or if the amount of the loss cannot be reasonably estimated. If it is probable that the loss has been
incurred and if the amount can be reasonably estimated, an estimated loss from a loss contingency accrued and reported directly on the company's balance sheet as a liability or a reduction of an asset. Gain contingencies are not reported in the financial statements and should be judiciously explained if disclosed in the notes Subsequent events. Another common note to the financial statements describes important events that occur between the balance sheet date and the date of issuance of the annual report, and provide evidence about conditions that did not exist on the balance sheet date. These subsequent events must be disclosed so that users may interpret the financial statements in light of the most recent company information If a subsequent event provides information about conditions that existed on the balance sheet date and significantly affect the estimates used in the preparation of the financial statements, the statements themselves are adjusted t, Related party transactions. FASB Statement No 57 requires that a company's transactions between related parties be disclosed in the notes to its financial statements. This disclosure includes the nature of the relationship, a description of the transaction including the dollar amounts, and any amounts due to or from the related party at the balance sheet date Through the SECs"integrated disclosures"provision, companies regulated by the sec now satisfy certain Form 10-k disclosure requirements by reference to information included in the annual report 8. Reporting techniqu One of three basic formats is generally used for balance sheet presentation: (a) the report form(the most common format)in which asset accounts are listed first and then liability and stockholders equity accounts are listed in sequential order directly below assets, (b) the account form that lists asset accounts on the left-hand side and liability and stockholders equity accounts on the right-hand side of the statement, and(c)the financial position form that first presents the amount of working capital, by listing current assets minus current liabilities, and then the remaining assets are added to working capital and the remaining liabilities are deducted from working capital to derive the residual stockholders equity Supporting schedules(e.g, listing of equipment items) and parenthetical notations(e.g, method of aluation for an account)may be used to disclose required and/or optional supplementary information, in addition to notes(or footnotes) 9. Balance sheet analysis flexibility, operating capability, and overall leverage(b)evaluate its income-producing performance for the Liquidity is the speed with which an asset of the company can be converted into cash or a liability paid. Information about liquidity helps users evaluate the timing of cash flows. Ratios:(a) Current ratio, (b) Quick ratio(acid-test ratio) Financial flexibility is the ability of the company to generate sufficient net cash inflows from operations, from investors and creditors, or from selling of long-term assets. Information about financial flexibility is necessary for evaluating the uncertainty of future cash flows Operating capability is the company's ability to maintain a given physical level of operations defined by either the volume of inventory produced or the productive capacity of the plant, property, and equipment This is important in evaluating the amount of future cash flows Overall leverage: comparing liabilities to assets held by a business gives an indication of the extent to which borrowed funds are used to leverage the owners' investments to increase the size of the firm. Debt atio: Total liabilities /total assets. Used as an indicator of the overall ability of the company to repay its
- 12- incurred and if the amount can be reasonably estimated, an estimated loss from a loss contingency is accrued and reported directly on the company's balance sheet as a liability or a reduction of an asset. Gain contingencies are not reported in the financial statements and should be judiciously explained if disclosed in the notes. Subsequent events. Another common note to the financial statements describes important events that occur between the balance sheet date and the date of issuance of the annual report, and provide evidence about conditions that did not exist on the balance sheet date. These subsequent events must be disclosed so that users may interpret the financial statements in light of the most recent company information. If a subsequent event provides information about conditions that existed on the balance sheet date and significantly affect the estimates used in the preparation of the financial statements, the statements themselves are adjusted. Related party transactions. FASB Statement No. 57 requires that a company's transactions between related parties be disclosed in the notes to its financial statements. This disclosure includes the nature of the relationship, a description of the transaction including the dollar amounts, and any amounts due to or from the related party at the balance sheet date. Through the SEC's "integrated disclosures" provision, companies regulated by the SEC now satisfy certain Form 10-K disclosure requirements by reference to information included in the annual report. 8. Reporting techniques One of three basic formats is generally used for balance sheet presentation: (a) the report form (the most common format) in which asset accounts are listed first and then liability and stockholders' equity accounts are listed in sequential order directly below assets, (b) the account form that lists asset accounts on the left-hand side and liability and stockholders' equity accounts on the right-hand side of the statement, and (c) the financial position form that first presents the amount of working capital, by listing current assets minus current liabilities, and then the remaining assets are added to working capital and the remaining liabilities are deducted from working capital to derive the residual stockholders' equity. Supporting schedules (e.g., listing of equipment items) and parenthetical notations (e.g., method of valuation for an account) may be used to disclose required and/or optional supplementary information, in addition to notes (or footnotes). 9. Balance Sheet analysis The balance sheet information helps external users (a) assess the company's liquidity, financial flexibility, operating capability, and overall leverage (b) evaluate its income-producing performance for the period. Liquidity is the speed with which an asset of the company can be converted into cash or a liability paid. Information about liquidity helps users evaluate the timing of cash flows. Ratios: (a) Current ratio, (b) Quick ratio (acid-test ratio). Financial flexibility is the ability of the company to generate sufficient net cash inflows from operations, from investors and creditors, or from selling of long-term assets. Information about financial flexibility is necessary for evaluating the uncertainty of future cash flows. Operating capability is the company's ability to maintain a given physical level of operations defined by either the volume of inventory produced or the productive capacity of the plant, property, and equipment. This is important in evaluating the amount of future cash flows Overall leverage: comparing liabilities to assets held by a business gives an indication of the extent to which borrowed funds are used to leverage the owners’ investments to increase the size of the firm. Debt ratio: Total liabilities / total assets. Used as an indicator of the overall ability of the company to repay its
debts. Generally, debt ratio should be below 50 percent( varies among industries) Lesson 4: THE INCOME STATEMENT AND INCOME RECOGNITION Learning Objectives After careful study, students will be able to Understand the concepts of income 2. Explain the conceptual guidelines for reporting income 3. Describe the major components of an income statement. 4. Compute income from continuing operations 5. Report results from discontinued operations 6. Identify extraordinary items 7. Explain revenue recognition at the time of sale, during production, and at time of cash receipt 8. Explain the conceptual issues regarding revenue recognition alternatives 9. Describe the alternative revenue recog methods Teaching hours 6 hour Teaching contents The income statement summarizes the results of a company's operations for the period. Instructor can ask students which statement they think is the most important financial statement if they are investor in capital market Concepts of income Under the capital maintenance concept, income for a period is the amount that may be paid to stockholders during that period while leaving the company as well off at the end of the period as it was at the beginning. In other words, income is the difference between the beginning and ending capital (or net asset) balances after adjustment for investments and disinvestments during the period. Accountants and economists could probably agree on the measurement of total income for the entire life of a company However, for shorter time periods income is subject to dispute, because the values of a company's beginning and ending assets and liabilities may be measured in a variety of ways 1. 2 Transactional approach The transactional approach is currently used for income measurement. Under this approach, a company records its assets and liabilities at historical cost, and does not record any changes in value unless a transaction, event, or circumstance has provided reliable evidence of the change. The transactional approach uses the accrual basis. That is, the impact of any change is recorded in the period in which it occurs, rather than the period in which related cash is paid or received by the company, and efforts and accomplishments are matched, so that reported income measures a company's earnings performance Using the accrual-based transactional approach, a company's net income is measured by the equation Net Income= Revenues-Expenses+ Gains-Losses 2. Elements of the income statement In FASB Statement of Concepts No 6, the FAsb defined the elements or"building blocks"of the 13-
- 13- debts. Generally, debt ratio should be below 50 percent (varies among industries). Lesson 4: THE INCOME STATEMENT AND INCOME RECOGNITION Learning Objectives After careful study , students will be able to: 1. Understand the concepts of income. 2. Explain the conceptual guidelines for reporting income. 3. Describe the major components of an income statement. 4. Compute income from continuing operations. 5. Report results from discontinued operations. 6. Identify extraordinary items. 7. Explain revenue recognition at the time of sale, during production, and at time of cash receipt. 8. Explain the conceptual issues regarding revenue recognition alternatives. 9. Describe the alternative revenue recognition methods. Teaching Hours 6 hours Teaching contents The income statement summarizes the results of a company's operations for the period. Instructor can ask students which statement they think is the most important financial statement if they are investor in capital market. 1. Concepts of income 1. 1 Capital maintenance Under the capital maintenance concept, income for a period is the amount that may be paid to stockholders during that period while leaving the company as well off at the end of the period as it was at the beginning. In other words, income is the difference between the beginning and ending capital (or net asset) balances after adjustment for investments and disinvestments during the period. Accountants and economists could probably agree on the measurement of total income for the entire life of a company. However, for shorter time periods income is subject to dispute, because the values of a company's beginning and ending assets and liabilities may be measured in a variety of ways. 1. 2 Transactional approach The transactional approach is currently used for income measurement. Under this approach, a company records its assets and liabilities at historical cost, and does not record any changes in value unless a transaction, event, or circumstance has provided reliable evidence of the change. The transactional approach uses the accrual basis. That is, the impact of any change is recorded in the period in which it occurs, rather than the period in which related cash is paid or received by the company, and efforts and accomplishments are matched, so that reported income measures a company's earnings performance. Using the accrual-based transactional approach, a company's net income is measured by the equation: Net Income = Revenues - Expenses + Gains - Losses 2. Elements of the income statement In FASB Statement of Concepts No. 6, the FASB defined the elements or "building blocks" of the
income statement: revenues, expenses, gains, and losses Revenues are inflows of (or increases in)assets of a company or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that are the company's ongoing major or central operations Expenses are outflows of (or decreases in) assets or incurrences of liabilities(or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that are the company's ongoing major or central operations Gains are increases in a company's equity(net assets) from peripheral or incidental transactions of the company and from all other events and circumstances affecting the company during a period except those that result from revenues or investments by owners Losses are decreases in a company's equity(net assets) from peripheral or incidental transactions of the company and from all other events and circumstances affecting the company during a period except those that result from expenses or distributions to owners Students should be remind that the distinction between revenues and gains, and expenses and losses depends on the nature and circumstances of the company 3. Income statement content 3. 1 Income from continuing operations Income from continuing operations summarizes the income from usual and recurring operating activities. It includes sales revenues(net of returns, allowances, and discounts), cost of goods sold operating expenses, other items, and income tax expense related to continuing operations. The computation of cost of goods sold (or cost of goods manufactured for a manufacturing company) is usually shown in a supporting schedule, not on the face of the income statement. Operating expenses are usually classified according to functional categories, such as selling expenses, and general and administrative expenses. Alternatively, expenses may be classified as variable(changing in direct proportion to changes in volume) or fixed (not affected by changes in volume). Other items include recurring revenues and expenses not directly related to the company's primary operations(for example, dividend revenue and interest revenue and expense), as well as material gains and losses from sales of assets that are not classified as results of discontinued operations, and material gains and losses that are not classified as extraordinary 3.2 Results from discontinued operations The results of discontinued operations section is included on the company's income statement directly after its income from continuing operations. The results from discontinued operations section includes (l) the operating income(loss)of the discontinued component for the period, and ( 2)the gain(loss) from its sale. The income(loss) from discontinued operations and the loss (or gain) from the sale of the component are reported net of income tax. That is, the related income taxes are deducted directly from each item, and only the after-tax amount is included in the computation of net income It may take some time for a company to plan and make a sale of a component of its operations The company classifies this component as held for sale at the end of the current accounting period when all six criteria discussed in the book are met. When a company classifies a component as held for sale, it records and reports the component at the lower of (1)its book value(book value of assets minus book value of liabilities)or(2) its fair value less any costs to sell. If the fair value(less any costs to sell) is less than the book value, the company records a loss and adjusts the book values of the assets of the component. The company reports the loss (after taxes) in the results of discontinued operations section of its income statement, as discussed earlier. It reports the assets and the liabilities in the respective asset and liability
- 14- income statement: revenues, expenses, gains, and losses. Revenues are inflows of (or increases in) assets of a company or settlement of its liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or other activities that are the company's ongoing major or central operations. Expenses are outflows of (or decreases in) assets or incurrences of liabilities (or a combination of both) during a period from delivering or producing goods, rendering services, or carrying out other activities that are the company's ongoing major or central operations. Gains are increases in a company’s equity (net assets) from peripheral or incidental transactions of the company and from all other events and circumstances affecting the company during a period except those that result from revenues or investments by owners. Losses are decreases in a company’s equity (net assets) from peripheral or incidental transactions of the company and from all other events and circumstances affecting the company during a period except those that result from expenses or distributions to owners. Students should be remind that the distinction between revenues and gains, and expenses and losses depends on the nature and circumstances of the company. 3. Income statement content 3.1 Income from continuing operations Income from continuing operations summarizes the income from usual and recurring operating activities. It includes sales revenues (net of returns, allowances, and discounts), cost of goods sold, operating expenses, other items, and income tax expense related to continuing operations. The computation of cost of goods sold (or cost of goods manufactured for a manufacturing company) is usually shown in a supporting schedule, not on the face of the income statement. Operating expenses are usually classified according to functional categories, such as selling expenses, and general and administrative expenses. Alternatively, expenses may be classified as variable (changing in direct proportion to changes in volume) or fixed (not affected by changes in volume). Other items include recurring revenues and expenses not directly related to the company's primary operations (for example, dividend revenue and interest revenue and expense), as well as material gains and losses from sales of assets that are not classified as results of discontinued operations, and material gains and losses that are not classified as extraordinary. 3.2 Results from discontinued operations The results of discontinued operations section is included on the company’s income statement directly after its income from continuing operations. The results from discontinued operations section includes (1) the operating income (loss) of the discontinued component for the period, and (2) the gain (loss) from its sale. The income (loss) from discontinued operations and the loss (or gain) from the sale of the component are reported net of income tax. That is, the related income taxes are deducted directly from each item, and only the after-tax amount is included in the computation of net income. It may take some time for a company to plan and make a sale of a component of its operations. The company classifies this component as held for sale at the end of the current accounting period when all six criteria discussed in the book are met. When a company classifies a component as held for sale, it records and reports the component at the lower of (1) its book value (book value of assets minus book value of liabilities) or (2) its fair value less any costs to sell. If the fair value (less any costs to sell) is less than the book value, the company records a loss and adjusts the book values of the assets of the component. The company reports the loss (after taxes) in the results of discontinued operations section of its income statement, as discussed earlier. It reports the assets and the liabilities in the respective asset and liability