Question

A. For each of the following, note whether it is a separately stated item or a part of ordinary income.

B. Then state where the shareholder would report it on their individual return.

C. Finally, explain why we have separately stated items.

Revenue

Gain on sale of property

Dividends

Interest income

Cost of goods sold

Loss on sale of investments

Salaries and wages

Travel expenses

Charitable donations

Interest expense

Answer 1

A.& C .

Revenue is nothing but what is earned by selling the goods and services in the normal course of business thus it will not be shown separately but forms part of income statement .

Gain on sale of property should be shown separately depending on its value and incidence as an exceptional item , because we do not sell properties as a part of business everyday , assets are held for the use in the business thus the gain arising is not in the ordinary course and it would over state profit .

Dividends are also shown separately in the income statement as the last item . Dividends are the profits distributed to the shareholders from the profit attributable to them . Showing dividend per share separately will help people identify how earnings per share has increased/decreased over the years .

Interest income depends on the nature , whether interest is on the investments or interest on some other activities . If the interest is on investments it doesn’t form part of operating income , as its earned from investing the capital . It would shown as a different item in the income statement but wouldn’t form a part of operating income .

Cost of goods sold is nothing but the costs incurred in converting raw material into finished products to be ultimately sold to earn revenue . This forms part of operating expenses and would be shown as a normal part of income statement .

Loss on sale of investments , as earlier told loss/gain on sale of investments that is assets does not arise on daily basis as a normal course of business(unless the entity is an investing company or a bank ) . Thus income /loss on such activities will affect the operating income directly . Thus loss on sale of investments should be shown separately as an exceptional item depending on its nature & quantum .

Salaries and wages are common operating expenses on any entity . Thus would form a normal part of operating expenses on an entity and no separate disclosure is required as such .

Travel expenses are also a normal part of income statement . But it should be examined whether travel expenses claimed and reimbursed are for the benefits of business/incurred for the business purpose . They are shown as a normal expense in the income statement .

Charitable donations ,donations are not a normal part of business , these form a part of corporate social responsibility . These items should be shown separately so that the shareholders can understand how and how much of it’s income is utilised for the chartitable purposes and whether it was reasonable or not .

Interest expense again depends whether the interest is paid on loans and other borrowings or interest paid for late payment of any dues that is statutory or other dues . These all form part of normal course of business and should be shown in the income statement . But if huge expense are incurred because of defaults of the company they should be appropriately disclosed to attract the attention of the shareholders .

B. Whether shareholder would report it in his return

Shareholder would report on it in his income only with the following :

Dividends

Interest income received (being interest expense of company )

Interest income paid (being the interest income of the company )

Salaries and wages received from the company .