For its fiscal year ending October 31, 2010, Molini Corporation reports the following partial data shown on the next page.

Income before incomes taxes ......... $540,000

Income tax expense (30% × $390,000) ..... 117,000

Income before extraordinary items ......... 423,000

Extraordinary loss from flood .......... 150,000

Net income ................ $273,000

The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.

Instructions

(a) Prepare a correct income statement, beginning with income before income taxes.

(b) Explain in memo form why the income statement data are misleading.