Orlando Fruit Co. is in the process of preparing its annual financial statements. Orlando Fruit is a large citrus grower located in central Florida. The following is a discussion between Kevin Kirk the controller, and Shirley Gwinn, the chief executive officer and president of Orlando Fruit Co.
Shirley: Kevin, I’ve got a question about your rough draft of this year’s income statement.
Kevin: Sure, Shirley. What’s your question?
Shirley: Well, your draft shows a net loss of $750,000.
Kevin: That’s right. We’d have had a profit, except for this year’s frost damage. I figured that the frost destroyed over 30% of our crop. We had a good year otherwise.
Shirley: That’s my concern. I estimated that if we eliminate the frost damage, we’d show a profit of . . . let’s see . . . about $250,000.
Kevin: That sounds about right.
Shirley: This income statement seems misleading. Why can’t we show the loss on the frost damage separately? That way the bank and our outside investors will be able to see that this year’s loss is just temporary. I’d hate to get them upset over nothing.
Kevin: Maybe we can do something. I recall from my accounting courses something about showing unusual items separately. Let’s see . . . yes, I remember.
They’re called extraordinary items.
Shirley: Well, we haven’t had any frost damage in over five years. This year’s damage is certainly extraordinary. Let’s do it!
Discuss the appropriateness of revising Orlando Fruit’s income statement to report the frost damage separately as an extraordinary item.