For determining value, however, these entries and the financial statements require adjustments.
These entries provide relevant information concerning past performance and future cash flows.
Assessing impact of nonoperating charges
A three-step process can aid in assessing the impact of nonoperating charges:
- reorganize the income statement into operating and nonoperating items,
- search the notes for embedded one-time items, and
- analyze each extraordinary item for its impact on future operations.
Noncash expenses usually
- lower an asset or
- increase a provision account in the liabilities.
In evaluating a business, there are four types of provisions:
- ongoing operating provisions,
- long-term operating provisions,
- non-operating restructuring provisions, and
- provisions created to smooth income.