Information concerning Krall Corporations 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

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

2. Which item in Kralls income statement affects the companys quality of earnings? Why does it have an effect on quality of earnings?