Question

Explain what constitutes discontinued operations and provide an example.

Answer 1

DISCONTINUED OPERATION

MEANING

Discontinued operations is an accounting term used to refer a company's core activity or business or part of business or product line that have been divested or shutdown. Such operations which is discontinued , are reported on the income statement sperately from continuing operations.

Companies often dispose of equipments, cancel the product lines,sell market segments, also shift their business models, all of these changes result in the discontinued operations .

EXAMPLE

Let us site the example of telephones. A company is engaged in the business of telephones. They divided the segment in to two as : rotary business units & wireless phone business units. Each unit sells 5 different models of telephones. After some period, when the telephone industry become more advanced, the profit margin and sales of rotary telephones started to decline drastically. Because of the easy accessibility of telephone facility through the advancement in technology, leads wireless phones more user friendly to public.

As a result of such changes, board of directors and management has decided to sell/ dispose of all the aspects of rotary business units, and decided to focus more on the wireless phone business unit alone.

This is the clear case of discontinued operations in business.