It could be perfect if business and life were as simple as producing goods, recording the profits and selling them. Anyway there are often circumstances that disrupt the cycle, and it’s part of the accountants job. Changes in the business climate or cost of goods can lead to exceptional or extraordinary gains and losses in a business.
Some things that can alter the income statement can include downsizing or restructuring the business. This used to be a rare thing in the business environment, but is now fairly commonplace. It’s done to offset losses in other areas and to decrease the cost of employees’ salaries and benefits. Anyway, there are costs involved with this as well, such as severance pay, outplacement services, and retirement costs.
In other circumstances, a business might decide to discontinue certain product lines. Western Union recently delivered its very last telegram. The nature of communication has changed with email, cell phones and other forms that telegrams have been rendered obsolete. It’s time to change your product mix when you no longer sell enough of a product at a high enough profit to make the costs of manufacturing it worthwhile.
Lawsuits and other legal actions can cause extraordinary losses or gains as well. If you win damages in a lawsuit against others, then you’ve incurred an extraordinary gain. If your own legal fees and damages or fines are excessive, then these can significantly impact the income statement.
Business would need to correct any errors or change accounting methods that had been made in previous financial reports. Accepted Accounting Procedures (GAAP) requires that businesses make any one-time losses or gains very visible in their income statement.
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