Information concerning Krall Corporation’s operations during 2014 follows.

a. Administrative expenses, $90,000

b. Cost of goods sold, $420,000

c. Extraordinary loss from an earthquake (net of taxes, $36,000), $60,000

d. Sales (net), $900,000

e. Selling expenses, $80,000

f. Income taxes expense applicable to continuing operations, $105,000

Required

1. Prepare the corporation’s income statement for the year ended December 31, 2014 (ignore earnings per share data).

2. Which item in Krall’s income statement affects the company’s quality of earnings? Why does it have an effect on quality of earnings?