Recognizing Income: A Key to Decision Making In reviewing the financial statements of Global Corporation you discover that a number of special items were included in its income statements for the years ended December 31, 2000 and 2001. In 2000, Global reported a loss of $34 million from discontinued operations as a result of closing its facilities throughout Asia and a reduction of

$7 million in reported income resulting from a change in accounting principles. During 2001, Global reported a gain of $21 million when land that was being held as a potential building site was purchased by the State of California under the right of eminent domain. In addition, a gain of

$45 million resulted from an out-of-court settlement on a patent infringement lawsuit the company had filed several years earlier. Global’s reported net income increased from

$100 million in 2000 to $110 million in 2001, including all of the adjustments.

a. Why do generally accepted accounting principles require companies to report transactions such as those listed above as separate items in the income statement?

b. Based on the information provided, did Global Corporation’s income from continuing operations increase or decrease in 2001?

c. Explain why an analysis of the impact of the special items in Global’s income statements would be likely to cause an informed investor to arrive at a different evaluation of the future earnings potential of Global Corporation than one who relied solely on changes in the amount of reported net income.