Regardless of the method of presentation in the financial statements, the analyst should eliminate the effect of extraordinary gains and losses in projecting data into the future.

Question

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Some analysts argue that such extraordinary events should be included in computing the current income of the firm, while others would leave them off when assessing operating performance. The choice can have a big impact on ratios that rely on earnings or earnings per share. Extraordinary gains can inflate returns and lower payout ratios if they are included in earnings. The analyst concerned about forecasting should include only those earnings from continuing operations; otherwise, the forecast will be seriously off its mark. Unfortunately, there is some inconsistency in the manner in which nonrecurring losses are treated, despite determined attempts by the accounting profession to ensure uniformity.

Regardless of the Method of Presentation in the Financial Statements