Income From Continuing Operations
Introduction
Income from continuing operations is the after-tax income or loss from activities that are not classified as discontinued operations. On the income statement it comes after operating income, non-operating items, and income tax expense, and before discontinued operations. If a company has no discontinued operations, it equals net income.
Investors and analysts use this subtotal as a forecasting starting point because it excludes qualifying discontinued operations. It still includes nonrecurring items and is not a measure of recurring earnings. This lesson explains the formula, statement presentation, worked examples, and common mistakes.
What Is Income from Continuing Operations?
To comprehend income from continuing operations, it’s essential to grasp the broader structure of the income statement, one of the three fundamental financial statements (alongside the balance sheet and cash flow statement) used in corporate finance and accounting. The income statement provides a detailed report of a company’s financial performance over a specific period, typically a quarter or year. It lists revenues, costs, expenses, and ultimately the net income or loss.
Income from continuing operations sits near the bottom of the income statement. Everything that belongs to the ongoing business is above it: revenues, cost of goods sold, operating expenses, non-operating items such as interest income and interest expense, and the income tax expense on all of those. The only thing reported below it is discontinued operations, shown net of tax, followed by net income. In other words, the subtotal separates the business the company is keeping from the business it is leaving, not operating activities from non-operating activities.
Where does income from continuing operations sit on the income statement?
Here is the skeleton of a multiple-step income statement for a company that sold a division during the year. The line in bold is the one this lesson is about.
| Income statement line | What it tells you |
|---|---|
| Net sales | Revenue from the ongoing business |
| Less: Cost of goods sold | Direct cost of what was sold |
| Gross profit | Net sales minus cost of goods sold |
| Less: Operating expenses | Selling, general and administrative costs, depreciation |
| Operating income | Profit from operations before financing and taxes |
| Plus or minus: Other revenues, gains, expenses and losses | Interest income, interest expense, and gains or losses on selling equipment |
| Income before income taxes | Pre-tax profit from continuing operations |
| Less: Income tax expense | Tax on continuing operations only |
| Income from continuing operations | After-tax profit from the business the company is keeping |
| Plus or minus: Discontinued operations, net of tax | Results of the component being sold or closed, plus the gain or loss on disposal, after its own tax |
| Net income | The bottom line |
| Earnings per share | Public companies show EPS for continuing operations and for net income |
What Goes Into Income from Continuing Operations?
The calculation of income from continuing operations involves several key components of the income statement:
- Revenues: Amounts earned from selling goods or providing services under applicable revenue recognition guidance. Cash collection may occur in a different period.
- Cost of Goods Sold (COGS): The cost of inventory sold, including applicable purchase or production costs.
- Gross Profit: The residual income after subtracting COGS from total revenues.
- Operating Expenses: These are the costs related to running the main business operations but are not directly tied to production. They include selling, general, and administrative expenses (SG&A), depreciation, and amortization.
- Operating Income: Also known as operating profit, this is the income left after deducting operating expenses from gross profit.
- Interest Expense: The cost incurred by the company for borrowing funds.
- Income Tax Expense: The current and deferred income tax that belongs to continuing operations. When a company also has discontinued operations, the total tax is split between the two sections. Accountants call this split intraperiod tax allocation (FASB ASC 740-20).
- Other Income and Expenses: Includes various non-operational financial impacts not included in operating expenses, such as investment income or losses not directly related to the core business activities.
How Do You Calculate Income from Continuing Operations?
The formula works in two steps. First you get to pre-tax income from the ongoing business, then you take off the tax that belongs to it:
Income before income taxes = Operating income + Other revenues and gains − Other expenses and losses
Income from continuing operations = Income before income taxes − Income tax expense
Notice what is inside the formula: interest, gains and losses on selling assets, impairment charges, restructuring costs, and other items that are unusual or do not happen every year. Under FASB ASC 220-20, unusual or infrequent items are shown as separate lines within continuing operations or disclosed in the notes. These items remain within continuing operations. Impairment and restructuring charges may be operating expenses depending on their nature; they are not automatically non-operating. Qualifying discontinued operations are presented separately below the subtotal, net of tax.
Why Does Income from Continuing Operations Matter?
Income from continuing operations holds significant importance for various stakeholders:
- Investors and Analysts: It helps assess profitability of continuing activities, including operating and non-operating items. Analysts assess nonrecurring items separately.
- Management: Offers insights into the effectiveness of operational strategies and decision-making.
- Creditors: Use it to judge whether the ongoing business earns enough to cover its debts and interest payments.
Financial Performance Analysis and Decision-Making
Analysts use this subtotal for trends and peer comparisons while assessing the persistence of its components. Entities within the scope of ASC 260 present basic and diluted EPS for continuing operations and net income on the face of the income statement. The difference between continuing operations EPS and net income EPS on the same basis represents discontinued operations per share. Two EPS figures may instead represent basic and diluted EPS; check their labels.
What Are the Limitations of Income from Continuing Operations?
Income from continuing operations is useful, but it has limits. It leaves out the results of discontinued operations, which can still be large enough to swing net income and cash. It also includes one-time items such as impairment charges or a gain on selling a building, so two years can look very different even when the underlying business did not change. Read it together with net income, the cash flow statement, and the notes to get the full picture.
Video Lesson: Elements of the Income Statement
In this lesson Professor Farhat walks through revenues, expenses, gains, and losses, then compares the single-step and multiple-step formats. Watch it before the examples below so the subtotals make sense. If you want the complete income statement module, including discontinued operations, it is part of the Intermediate Accounting course, and you can try the teaching style for free in the free sample course.
Income Statement Formats
There are two main formats of income statements: multiple-step and single-step. Each has its own approach to presenting this information, catering to different analysis needs.
Single-Step Income Statement and Income from Continuing Operations
A single-step income statement groups all revenues and gains together, groups all expenses and losses together, and subtracts once. There is no gross profit line and no operating income line. Here is the point students often miss: the single-step format still reports income from continuing operations whenever the company has a discontinued operation. FASB ASC 205-20 requires discontinued operations to be shown separately from continuing operations in any format. What the single-step format drops is the operating versus non-operating split, not the continuing versus discontinued split.
- Total Revenues and Gains: This aggregates all sources of income, whether from core operations or other activities like investments.
- Total Expenses and Losses: Similarly, this combines all expenses and losses, regardless of their nature.
- Net Income: By subtracting total expenses and losses from total revenues and gains, the single-step statement arrives at net income.
The single-step format is valued for its simplicity and clarity, making it easy to understand at a glance. It’s particularly suitable for small businesses or industries where the distinction between operating and non-operating activities is less significant.
Single-Step Income Statement Example
| Description | Amount (USD) |
|---|---|
| Total Revenues and Gains | 102,000 |
| Total Expenses and Losses | (87,750) |
| Net Income | 14,250 |
This is the same company you will see in the multiple-step example below. Total revenues and gains of 102,000 are net sales of 100,000 plus interest income of 2,000. Total expenses and losses of 87,750 are cost of goods sold of 60,000, operating expenses of 20,000, interest expense of 3,000, and income tax expense of 4,750. Net income is 14,250 either way. The format changes how much detail you see, never the bottom line. Because this company has no discontinued operations, its income from continuing operations and its net income are the same 14,250.
Multiple-Step Income Statement and Income from Continuing Operations
A multiple-step income statement shows the subtotals along the way: gross profit, operating income, income before income taxes, and then income from continuing operations. Operating and non-operating items are kept apart, which makes it easier to see how much profit came from selling products versus from financing or one-time events. If the company has a discontinued operation, it appears below the subtotal, net of tax.
Key components relevant to income from continuing operations in a multiple-step income statement include:
- Operating Income: Operating income equals gross profit minus selling, general, administrative, and other operating expenses. COGS has already been deducted in calculating gross profit and must not be deducted again.
- Non-Operating Income and Expenses: These items include interest income, interest expenses, gains or losses from investments, and other income or expenses not related to the main business activities. They are subtracted or added after operating income to derive income before taxes.
- Income Before Taxes from Continuing Operations: This figure is calculated by adjusting the operating income with non-operating incomes and expenses.
- Income Tax Expense: Reflects the taxes attributable to the continuing operations.
- Income from Continuing Operations: It’s the net result after subtracting income tax expense from income before taxes. This figure provides insight into the profitability of the company’s ongoing, core business activities.
The multiple-step income statement is favored for its detailed insights, helping stakeholders understand where revenue is generated and where expenses are incurred. It’s particularly useful for analyzing operational efficiency, cost management, and the impact of non-operational elements on the bottom line.
Multiple-Step Income Statement Example
| Description | Amount (USD) |
|---|---|
| Net Sales | 100,000 |
| Cost of Goods Sold (COGS) | (60,000) |
| Gross Profit | 40,000 |
| Operating Expenses | (20,000) |
| Operating Income | 20,000 |
| Interest Income | 2,000 |
| Interest Expense | (3,000) |
| Income Before Taxes from Continuing Operations | 19,000 |
| Income Tax Expense | (4,750) |
| Income from Continuing Operations | 14,250 |
What Happens When a Company Has Discontinued Operations?
Now take the same company and add one fact: during the year it sold a division that was a separate major line of business. Under FASB ASC 205-20, a component that has been disposed of, or is held for sale, and that represents a strategic shift with a major effect on operations and financial results qualifies as a discontinued operation. Its results come out of continuing operations and are reported on their own, net of tax, with prior-period comparative statements recast consistently.
Assume the division lost 8,000 before tax while it was still being run, the company recorded a 2,000 pre-tax gain on the sale, and the tax rate is 25 percent. Income from continuing operations stays at 14,250. Here is the bottom of the income statement:
| Description | Amount (USD) |
|---|---|
| Income from continuing operations | 14,250 |
| Discontinued operations: | |
| Loss from operations of discontinued division, net of income tax benefit of 2,000 | (6,000) |
| Gain on disposal of discontinued division, net of income tax of 500 | 1,500 |
| Loss from discontinued operations, net of tax | (4,500) |
| Net income | 9,750 |
Check the math: the operating loss of 8,000 carries a tax benefit of 2,000 (8,000 × 25 percent), so it is shown at 6,000. The gain of 2,000 carries tax of 500, so it is shown at 1,500. Together that is a 4,500 loss, and 14,250 − 4,500 = 9,750.
Two things to notice. First, the tax on continuing operations is still 4,750 and the tax effect of the discontinued division is shown separately. Splitting total tax between the two sections is intraperiod tax allocation (FASB ASC 740-20), an important distinction in accounting problems. Second, assuming 5,000 weighted-average common shares outstanding, no preferred dividends, and no potentially dilutive securities, it reports earnings per share of 2.85 from continuing operations (14,250 ÷ 5,000), a loss per share of 0.90 from discontinued operations (4,500 ÷ 5,000), and 1.95 for net income (9,750 ÷ 5,000). FASB ASC 260 requires the continuing operations and net income figures on the face of the income statement; the discontinued operations figure can go on the face or in the notes.
Does IFRS handle this the same way?
IFRS 5 also separates qualifying discontinued operations from continuing operations and requires a single net-of-tax amount for discontinued operations. Classification criteria and other presentation requirements should be assessed under the applicable IFRS guidance; the differences are not merely terminology.
Common Mistakes Students Make
- Pushing a big one-time loss, such as a hurricane loss or a goodwill impairment, below income from continuing operations. Under current U.S. GAAP it stays inside the subtotal.
- Reporting discontinued operations before tax. The line must be net of tax, and the tax effect must be shown or disclosed.
- Mixing up operating income and income from continuing operations. Operating income is before interest, other items, and tax. Income from continuing operations is after all of them.
- Assuming a single-step income statement cannot show discontinued operations. It can and it must, whenever the company has one.
- Still writing extraordinary items on an exam answer. U.S. GAAP eliminated the category through ASU 2015-01, and IAS 1 prohibits extraordinary items.
Practice Question
Under current U.S. GAAP, which of the following is reported below income from continuing operations?
- A. A loss from a flood that destroyed the company’s main warehouse
- B. The after-tax results of a major business segment that was sold during the year and qualifies as a discontinued operation
- C. A restructuring charge for closing three underperforming stores
- D. A goodwill impairment loss
Answer: B. Items A, C and D are unusual or infrequent, but ASC 220-20 keeps them inside income from continuing operations, shown separately or disclosed in the notes. Only a discontinued operation under ASC 205-20 is reported below the subtotal, net of tax.
Key Takeaways
- Income from continuing operations is after-tax profit from the business the company is keeping.
- It sits after income tax expense and before discontinued operations. If there are no discontinued operations, it equals net income.
- Non-operating items and one-time items such as impairments and restructuring charges stay inside it (FASB ASC 220-20).
- Only discontinued operations are reported below it, net of tax (FASB ASC 205-20). Extraordinary items were removed from U.S. GAAP by ASU 2015-01.
- Single-step and multiple-step formats give the same net income and the same income from continuing operations. The format only changes the subtotals in between.
- Public companies must show earnings per share for income from continuing operations and for net income (FASB ASC 260).
Keep learning
Compare this subtotal with Income from Discontinued Operations: Definition, Criteria, and Example.
Income from continuing operations builds on the basic elements of the income statement. If any of the terms above felt new, start with Elements of Financial Statements: 10 Essential Definitions and the FASB Conceptual Framework. To see where net income ends up, read The Stockholders’ Equity. CPA candidates can practice this topic with multiple-choice questions in the FAR Test Bank, and students in a first accounting course will find the full lecture set in Financial Accounting Principles.
FAQs
What is the difference between income from continuing operations and net income?
Net income is income from continuing operations plus or minus the results of discontinued operations, net of tax. When a company has no discontinued operations, the two numbers are identical and the income statement usually goes straight from income tax expense to net income.
How do discontinued operations affect income from continuing operations?
For a component qualifying under ASC 205-20, operating results and disposal or measurement gains and losses are excluded from continuing operations and presented separately, net of tax. Prior-period comparative statements are recast consistently. Selling or closing a business does not automatically qualify it for discontinued operations reporting.
Can income from continuing operations fluctuate significantly?
Yes. It includes unusual or infrequent items such as restructuring charges, impairment losses, lawsuit settlements, and gains or losses on selling equipment. FASB ASC 220-20 requires these to be shown as separate lines within continuing operations or disclosed in the notes, so analysts can adjust for them when they forecast.
How do companies improve income from continuing operations?
Higher sales, improved margins, lower operating or financing costs, and changes in tax expense may increase the subtotal. Nonrecurring gains can also increase it without indicating sustainable improvement. A division’s results and disposal gain or loss are excluded only if it qualifies as a discontinued operation under ASC 205-20; otherwise, they remain in continuing operations.
What role does income from continuing operations play in financial analysis?
It is a useful forecasting starting point because it excludes qualifying discontinued operations, although it can include nonrecurring items. Analysts build margin ratios and trend comparisons from it, and public companies must report earnings per share for income from continuing operations on the face of the income statement under FASB ASC 260.
Are extraordinary items still reported below income from continuing operations?
No. The Financial Accounting Standards Board (FASB) removed the extraordinary items category from U.S. GAAP with Accounting Standards Update 2015-01, effective for fiscal years beginning after December 15, 2015. Items that used to qualify, such as losses from a rare natural disaster, are now reported inside income from continuing operations as unusual or infrequent items under ASC 220-20. IAS 1 prohibits extraordinary items. Today, discontinued operations are the only line presented between income from continuing operations and net income. You can read the current guidance in the FASB Accounting Standards Codification at asc.fasb.org.
Does IFRS use income from continuing operations?
Yes. IFRS distinguishes continuing operations from qualifying discontinued operations. IFRS 5 requires a single net-of-tax amount for discontinued operations, with supporting analysis in the statement or notes. Apply IFRS-specific classification and presentation requirements.
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