1 Sustainable Income and Ratio Analysis Description of Sustainable Income A company can be valued based on its estimated future income. Sustainable income refers to the earnings that are required by an organization to meet its primary costs that is most likely to be earned in the future. It is the net income that is deducted for irregular items. There are three types of irregular items that can be found in the income statement. These are; operations that have been stopped and are now obsolete, events and items that do not ordinarily occur, and alterations that are made to the principles of accounting. Irregular items may include gains, expenses, losses and extra-ordinary income (Weygandt, Kimmel, & Kieso, 2015). These irregular items are found before arriving at the net income on the income statement. Analysts are interested in determining sustainable income because it acts as an indicator of the future performance of the company. Importance of Sustainable Income Sustainable income is important because it enables the income statement user to determine the purpose of a multi-step income statement. It is also useful in making a forecast of what the organization may earn in future.
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Items that Affect Sustainable Income In the income statement, there are two main items that may have an impact on the future income of operations that have been discontinued and items that do not ordinarily occur on the income statement (Davidson, 2018). Extraordinary items include operations that have been stopped, revenue that is earned when the company or a part of its business is sold. For expenses or revenues to be considered extraordinary, they must occur infrequently and it should not be predictable whether they can occur again in future.
3 References Weygandt, J.J., Kimmel, P.D. & Kieso, D.E. (2015). Financial & Managerial Accounting. John Wiley & Sons. Davidson, W. (2018). Financial Forecasting and Decision Making. John Wiley & Sons.