Question

1-What is the difference between Discontinued Operations and Extraordinary Items?

2-What is the difference between Deferred Charges and Unearned Revenue?

3-Which of the following is not a stock market ratio?

A. Earnings per share B. Book value C. Working capital investment D. Dividend Yield

Answer 1

(1): Discontinued operations are a part of a company’s main business and have been disposed of. Because the operations have been disposed of they are reported separately from the continued operations. Both (discontinued as well as continued operations) are reported on the income statement. The reason for separately showing the discontinuing operations from the continuing operations is that it enables the investors and stakeholders to differentiate between the profits from continuing operations and from activities that have now ceased.

Extraordinary item, on the other hand, includes the gains (or the losses) that are included in a company’s income statement that arise from activities or events that are either unusual in nature or infrequent in nature. Companies are required to show extraordinary item separately from their operating earnings as the extraordinary items represent a one-time charge or a one-time income.

(2): Deferred charges are prepaid expense, usually long term in nature. Deferred charges are carried as an asset on the balance sheet of a company until it is fully used. Once it is has been fully consumed or used it is reported as an expense in the current accounting period.

Unearned revenue is that revenue that has been received as an advance. In other words money has been received but the goods or services are not provided, but will be provided at a later date. Until the time the goods or services are provided the unearned revenue will stand as a liability in the balance sheet. Once the goods or services have been provided the unearned revenue account will be closed by recognizing the amount as revenue.

(3): The answer is option ‘c’ – working capital investment. This is a liquidity ratio and not a stock market ratio.