Extraordinary items are shown net of taxes in a separate section of the income statement just above net income. Material gains and losses that are either unusual or occur infrequently, but not both, are excluded from the extraordinary items. If material, these items are disclosed separately, if immaterial, they may be combined with other items in the income statement. When an entity adopts a new accounting principle that is different from one previously used, a change in accounting principle results. The cumulative effect of the change in accounting principle will be computed retroactively on the income statement for the year in which the change occurred.
Accountants make extensive use of estimates in preparing financial statements.
We use adjustments that grow out of the calculation of estimates in accounting to determine income for the current period and future periods and do not charge or credit them directly to Retained Earnings. When we relate the income tax effect of an unusual item to that item when it appears on the income statement, it is called intraperiod tax allocation . Income tax expense related to continuing operations is shown on the income statement at its appropriately computed amount. All other items included in the determination of net income should be shown net of their related tax effect. The tax amount may be disclosed in the income statement or in a footnote.