Question #36
Reading: Reading 12 Evaluating Quality of Financial Reports
PDF File: Reading 12 Evaluating Quality of Financial Reports.pdf
Page: 32
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Galaxy Company recognized a restructuring charge in its year-end income statement. Similar restructuring charges have occurred in the past. In addition, Galaxy recognized an extraordinary loss. Galaxy uses the term "operational earnings" when discussing its financial results. According to Galaxy, "operational earnings" excludes special nonrecurring transactions such as restructuring charges, discontinued operations, and extraordinary items. Should the restructuring charge and extraordinary loss be included or excluded from "operational earnings" for analytical purposes?
Answer Choices:
A. Both are included
B. One is included
C. Both are excluded
Explanation
The restructuring charge does not appear to be nonrecurring; thus, it should be included
in "operational earnings." By definition, an extraordinary loss is unusual in nature and
infrequent in occurrence. Therefore, the extraordinary loss should be excluded from
"operational earnings."