The classified balance sheet
Most US companies present a classified balance sheet, separating current from noncurrent assets and liabilities. An item is current if it's expected to be converted to cash, sold, or consumed within one year or the operating cycle, whichever is longer.
Multi-step income statement
The multi-step format separates operating from non-operating activity, which the exam tests heavily:
- Net sales − COGS = Gross profit
- Gross profit − Operating expenses = Operating income
- Operating income +/− Non-operating items (interest expense, gains/losses) = Income before tax
- Income before tax − Tax expense = Income from continuing operations
- +/− Discontinued operations (net of tax) = Net income
IMPORTANT: A component qualifies as a discontinued operation only if its disposal represents a strategic shift that has (or will have) a major effect on operations and financial results (e.g., disposal of a major geographic area or a major line of business) — not just any asset sale.
EPS presentation
When there are discontinued operations, EPS must be shown for income from continuing operations, the discontinued operations, and net income — either on the face of the statement or in the notes.
EXAM TIP: Discontinued operations are always presented net of tax, separately from continuing operations, even though the components that make it up (operating results and any gain/loss on disposal) may be taxed at different times.