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FAR: Conceptual Framework and Financial Reporting: Discontinued Operations - YouTube
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All right, my friends, our next skills
practice involves discontinued
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operations. So they tell us we鈥檙e going
to have a trial balance containing the
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income statement, general ledger accounts
for a company called Frenchie, Inc. And
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as of right now, they have 3 reportable
segments: food, beverage, and packaging.
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But during the current year, Frenchie
made the decision, here we go, to sell
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the packaging component of its business.
So now the discontinued rules apply, so
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assuming that we鈥檙e actively trying to
locate a buyer, the sale is imminent
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within the next year, then the
discontinued rules are going to apply. So
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they tell us the sale is expected to take
place in the next fiscal year, so now
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remember, that income statement is going
to have your core business, your
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operating, your unusual or infrequent.
We鈥檒l then have income from continuing
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operations before tax, tax expense,
income from continuing operations after
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tax, and then we鈥檒l have our discontinued
operation. The reason it has to be moved
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down below, predictive value, highly
irregular. We鈥檝e never sold this
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component before, we can never sell it
gain, so we鈥檙e going to have to list
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below, remember, potentially 3
calculations. Number 1, is it impaired,
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and then the gain or loss in operations
to the date of sale, and then the
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ultimate gain or loss on sale. And
remember, all that is going to have to be
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reported down below. Discontinued
operations, net of tax. And don鈥檛 forget
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net of tax. And then we鈥檒l have our
bottom-line net income. So Frenchie
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conducted impairment testing and
determined that the packaging segment
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good, it鈥檚 not impaired, so we don鈥檛 have
to do one of those 3 calculations. So
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what I鈥檓 going to do is walk you through
the numbers, see the 3 individual
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components, consolidate, add all 3
together, and then we鈥檒l back out from
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that the packaging division that鈥檚 being
sold off. So let鈥檚 do it. We鈥檝e got all
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components listed for Frenchie, Inc. So
we have our trial balance, so the sales
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revenue is going to be the sum of the
sales revenue for the 3 separate
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components, as we鈥檙e going to see. We
back out our returns, we have our cost of
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goods sold, freight out, salary,
commissions, so on and so forth. So this
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is for all 3 components. Let鈥檚 just see,
one at a time now, if we take a look at
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the various components, okay, we鈥檝e got
the food, that is not being discontinued,
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so that鈥檚 going to be staying with us.
Then we have beverage. That is not being
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sold off, that鈥檚 staying with us.
Lastly, we have our packaging. So
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obviously the packaging, the one on the
far right is the one that will separately
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be listed down below as a discontinued
operation. For right now, what you鈥檙e
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looking at on the screen is, well what
if...we don鈥檛 sell off the packaging?
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Then all 3 of these are going to be
combined. So then our trial balance for
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all components is exactly as it鈥檚 shown
here. So the sales revenue, obviously,
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the 725, for example, if you add up the
400, the 250, the 75, thus you have your
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total sales revenue of 725. Your
returns, the 8, the 10, the 3, so on and
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so forth, okay. So for right now, all
components, if we weren鈥檛 selling off
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packaging, we would then create our
income statement, balance statement,
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statement of cash flow, looking at all 3
entities. But when we prepare our income
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statement and we sell off packaging,
we鈥檙e going to have to now isolate all
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those accounts for packaging and list
them within discontinued operations, and
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that鈥檚 what we鈥檒l do next. Okay, so one
more time, guys, we got our trial
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balance, not going to balance though,
we鈥檒l just note, we only have our income
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statement accounts here. So we鈥檝e got
all our debits, our expenses and losses,
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we have our credits, our revenues and
gains for all components. And then if we
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break it down by component. So for
example, we鈥檙e going to be discontinuing
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the packaging segment. When we
discontinue the packaging segment, we鈥檙e
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going to lose all those debits, expenses,
and losses of 63,100. We鈥檙e going to
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lose all those revenues of gains, 78,500.
So the profit contributed from
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packaging, 15,400, will be eliminated.
That鈥檚 going to be moved to discontinued
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operation. But before we do that, let鈥檚
just review, if we were going to take
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this information, combine it, all we鈥檙e
doing is taking the 400, the 250, the 75,
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we鈥檙e going to add up and get our total
sales. But then remember, top line on an
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income statement is net sales, so we鈥檙e
going to back out the 8, the 10, and the
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3, to 21,000. So when we do for all 3
components, with no discontinued
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operation, okay, we鈥檝e got the 725,000,
okay, that鈥檚 going to be our total sales,
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gross, minus the 21,000. And if you take
the 725, minus that, 21,000, there鈥檚 for
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all 3 components, without any
discontinued operation, all 3 components
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together, combined sales of 704. The cost
of goods sold, the 360, well that鈥檚 the
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sum of the 210, the 120, the 30,
obviously 360,000, all 3 entities. Gross
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profit, 344, SG&A, adding across, we then
have our income from operations, we then
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have other revenues and gains, we then
have income before taxes, income tax
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expense, net income. Please notice,
there鈥檚 no income from continuing
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operations just yet. If we鈥檙e not
discontinuing the packaging division,
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then this is how our income statement
will look for Frenchie, Inc. But watch
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now, when we take the packaging, we鈥檙e
going to take this now, and basically
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move all this information down below.
But remember, materiality. We don鈥檛 want
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to overwhelm people with details. So
what we鈥檙e going to do, now that it鈥檚 a
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discontinued operation, what we鈥檙e going
to show is, what turned out to be the
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profit from the packaging division,
15,400. We鈥檙e simply going to report
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that as a discontinued operation, net of
tax. All righty, so now let鈥檚 take a
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look one more time, here鈥檚 our income
statement for all three components
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combined. Don鈥檛 worry about the numbers
so much. Just focus high level. Here鈥檚
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our format, and we have all 3 components
combined. Now, what if we segregate
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Frenchie, Inc., and now we just have 2 of
the 3, the food and the beverage?
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Remember, we鈥檙e selling the packaging.
So for example, where did we get the
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$632,000 from? Well that $632,000 would
be the sum of the food and the beverage,
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the 400 plus the 250, the 650, minus the
18,000, the sales returns of 8 and 10. So
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now we鈥檙e excluding packaging. So when
we have a discontinued operation, now
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we鈥檙e just combining 2 of the 3
components, we just have the sales
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revenue, the net sales for the 2
divisions that we鈥檙e keeping, cost of
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goods sold, that 330, just one more time,
where are we getting that 330? That鈥檚
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the 210 for food, plus the 120 for the
beverage, 330, and so on and so on. But
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notice how the titles change, and this is
really what I want to emphasize with you
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guys. So we still have sales revenue
minus cost of goods sold, SG&A, income
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from now, that鈥檚 going to be income from
operations, from your core business,
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category number 1. Then we have our
other revenues and gains, our other
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expenses and losses. Giving us, look,
it鈥檚 in red now. Income from continuing
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operations after tax. That puts the
reader of the financial statement on
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notice that hey, there鈥檚 got to be a
discontinued operation. If we didn鈥檛
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discontinue the operation, notice that
line item鈥檚 called income before taxes.
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Now we鈥檙e calling it income from
continuing operations before tax. Then
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we show our tax expense just for those 2
components, income from continuing
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operations, therefore after tax. Now do
y鈥檃ll see the discontinued operation?
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That鈥檚 15,400, and by the way, that鈥檚
already net of tax, just as an FYI. That
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15,400, if you go back up here, our check
figures, if you take all the debits,
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expenses, and the losses, all your
revenues and gains, the difference is
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15,400. And one of those line items was
already income tax expense. So that
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15,400 is already net of tax. So we take
all that information, and with a
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discontinued operation, separately
reported, right. So we have our income
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tax expense, income from continuing
operations after tax, and then a line
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item, discontinued operations, which we
know is reported net of tax. Then we have
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our income from discontinued operations,
15,400 again, already net of tax. And
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there lies our net income, 31,650. If
you notice, the 31,650 and the 31,650 are
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identical. The difference is, we鈥檝e
taken that packaging division and moved
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it all down below to put the world on
notice, hey, when you鈥檙e trying to
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predict future performance, you better
exclude the sales, the revenue, the
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expenses, the losses from that particular
division, because it鈥檚 not going to recur
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in the future, because we plan on selling
it off within the next year. So that鈥檚
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at a high level, don鈥檛 worry too much
about the numbers. I really just wanted
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to emphasize the format. Now we鈥檒l move
into an example, but instead of selling,
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I mean, ironically, when I looked at
this, I said, why did they choose to sell
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packaging, right? So if you look at the
packaging, they actually had a profit
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after tax of 15,400. So it looked to me
that if they鈥檙e going to sell off
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anything, they might want to sell off the
beverage, right, because that has a loss
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of 1,750. So now we鈥檒l go through and
actually focus in on the numbers, but
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we鈥檒l keep the food and the packaging,
now we鈥檙e going to sell off the beverage.
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