discontinued operations

(noun)

A discontinued operation is a component of an enterprise that has either been disposed of, or is classified as "held for sale", and also represents a separate major line of business or geographical area of operations; and is part of a single, co-ordinated plan to dispose of this separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to resale.

Examples of discontinued operations in the following topics:

  • Other Expenses

    • Other expenses include SG&A, depreciation, amortization, R&D, finance costs, income tax expense, discontinued operations expenses.
    • General expenses- general operating expenses and taxes that are directly related to the general operation of the company, but don't relate to the other two categories.
    • Discontinued operations are the most common type of irregular items.
    • Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.
    • Discontinued operations must be shown separately.

  • Pro Forma Income Statement

    • Revenue - Cash inflows or other enhancements of assets of an entity during a period from delivering or producing goods, rendering services, or other activities that constitute the entity's ongoing major operations.
    • Other expenses or losses - not related to primary business operations, (e.g. foreign exchange loss).
    • Discontinued operations is the most common type of irregular items.
    • Shifting business location(s), stopping production temporarily, or changes due to technological improvement do not qualify as discontinued operations.
    • Discontinued operations must be shown separately.

  • Earnings per Share

    • In the United States, the Financial Accounting Standards Board (FASB) requires that companies' income statements report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
    • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
    • Earnings per share for continuing operations and net income are more complicated; any preferred dividends are removed from net income before calculating EPS.

  • Calculating Diluted Earnings per Share

    • In other words, they make an EPS calculation for income from continuing operations, discontinued operations, extraordinary items, changes in accounting principle, and net income.

  • Elements of the Income Statement

    • It is also known as the profit and loss statement (P&L), statement of operations, or statement of earnings.
    • First, operating expenses are subtracted from gross profit.
    • This yields income from operations.
    • The operating section includes revenue and expenses.
    • This could include items such as restructurings, discontinued operations, and disposals of investments or of property, plant and equipment.

  • Ratio Analysis and EPS

    • In the United States, the Financial Accounting Standards Board (FASB) requires companies' income statements to report EPS for each of the major categories of the income statement: continuing operations, discontinued operations, extraordinary items, and net income.
    • The EPS formula does not include preferred dividends for categories outside of continued operations and net income.
    • Earnings per share for continuing operations and net income are more complicated in that any preferred dividends are removed from net income before calculating EPS.

  • Price/Earnings Ratio

    • Trailing P/E from continued operations: Instead of net income, this uses operating earnings, which exclude earnings from discontinued operations, extraordinary items (e.g. one-off windfalls and write-downs), and accounting changes.

  • Operating Margin

    • The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
    • It is found by dividing operating income by revenue, where operating income is revenue minus operating expenses .
    • However, the operating margin is not a perfect measurement.
    • Furthermore, the operating margin is simply revenue.
    • The operating margin is found by dividing net operating income by total revenue.

  • Uses of the Financial Statement

    • Whether or not to continue or discontinue part of the business.

  • Leverage Models

    • These ratios tell us that if the unit variable cost is constant, then as sales increase, operating leverage decreases.
    • Another common way of defining operating leverage is by dividing total fixed costs by operating income, or EBIT (earnings before interest and taxes).
    • The Degree of Operating Leverage is closely related to the rate of increase in the operating margin, which is the ratio of operating income to net revenue.
    • As sales increase past the break-even point, both operating margin and the DOL increase rapidly from 0%.
    • Operating leverage is equal to total fixed costs divided by operating income.