Companies report irregular items as part of the net income, and the items include discontinued operations, extraordinary items, and unusual gains and losses. Others include changes in accounting principles, changes in estimates and correction of errors. First, discontinued operations entail situations when the company eliminates results of operations and cash flows of the component from its continuing activities. Similarly, it occurs when there is no important continuing involvement in that component after the occurrence a disposal transaction (Hunt & Kieso, 2012). Second, extraordinary items refer to nonrecurring material items that are characterized by their unusual nature and infrequency of occurrence. Therefore, for an item on the income statement to be considered extraordinary, both of its characteristics must exist. Third, unusual gains and losses entail material gain and losses that possess unusual nature or occur infrequently, but should not have both features, are excluded from the classification of extraordinary items.

Fourth, changes in accounting principles occur in a situation when the company employs a new accounting principle that is different from what they previously used (Hunt & Kieso, 2012). The company will recognize changes in the accounting principle through making retrospective adjustments on its financial statements. Fifth, with changes in estimates, adjustments that result from using estimates in accounting are incorporated in determining income for both current and future periods and they are not credited directly to retained earnings. Sixth, with correction of errors, companies must ensure that they correct errors in their financial statements by making proper entries. On the same note, corrections of errors are considered prior period adjustments (Hunt & Kieso, 2012).

Reference

Hunt, M. F., & Kieso, D. E. (2012). Problem solving survival guide, Intermediate accounting, Fourteenth edition. Hoboken, N.J.: John Wiley & Sons.

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