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should be excluded.
4. Income from Continuing Operations (Net Income from Continuing Operations)
This is the same as above, but taxes are subtracted. From a shareholder perspective, this is a key line, and it's also a good place to start since it is net of both interest and taxes. Furthermore, it excludes the non-recurring items discussed above, which instead fall into net income but can make net income an inferior gauge of operating performance.
5. Net Income
Compared to income from continuing operations, net income has three additional items that contribute to it: extraordinary items, discontinued operations, and accounting changes. They are all presented net of tax. You can see two of these on Sprint's income statement: "discontinued operations" and the "cumulative effect of accounting changes" are both shown net of taxes--after the income tax expense (benefit) line.
You should check to see if you disagree with the company's classification, particularly concerning extraordinary items. Extraordinary items are deemed to be both "unusual and infrequent" in nature. However, if the item is deemed to be either "unusual" or "infrequent," it will instead be classified under income from continuing operations.
Summary
In theory, the idea behind accrual accounting should make reported profits superior to cash flow as a gauge of operating performance. But in practice, timing issues and classification choices can paint a profit picture that is not sustainable. Our goal is to capture normalized earnings generated by ongoing operations.
To do that, we must be alert to timing issues that temporarily inflate (or deflate) reported profits. Furthermore, we should exclude items that are not recurring, resulting from either one-time events or some activity other than business operations. Income from continuing operations--either pre-tax or after-tax--is a good place to start. For gauging operating performance, it is a better starting place than net income, because net income often includes several non-recurring items such as discontinued operations, accounting changes, and extraordinary items (which are both unusual and infrequent).
We should be alert to items that are technically classified under income from continuing operations but perhaps should be manually excluded. This may include investment gains and losses, items deemed either "unusual" or "infrequent," and other one-time transactions such as the early retirement of debt.
Revenue
Revenue recognition refers to a set of accounting rules that governs how a company accounts for its sales. Many corporate accounting scandals have started with companies admitting they have reported "irregular" revenues. This kind of
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