(URGENT) NORMALISED EARNINGS (1 Viewer)

[aqwerty13402]

Can someone please explain to me how normalised earnings is a limitation? I get WHAT it is (i.e. The earnings adjusted to take into account cyclical upswings or downswings in the economy, or to remove one-time influences) but I dont get what the actual limitation is. Is it:

A. That once they normalise the earnings, its no longer accurate so it's misleading
or
B. The limitation is that some businesses DONT normalise earnings
​

Sorry, the two business studies teachers are literally saying two different things and my exam is tomorrow at 8am. I am stressed.

 

[its_ace21]

a

 

[its_ace21]

Normalised earnings
- Process of removing one-time influences from the balance sheet such as special circumstances or economic upswing/downswing

• Removal of a land sale (outlier as you are not selling land everyday), which would achieve a large capital gain + distort the business’s true earnings

- * A company normalises its earnings to avoid including unusual events that create a false impression*
- Purpose - To provide a more realistic assessment of the earning performance of a business

- Businesses often report normalised earnings – where they remove the impact of inflation and one-off or unusual influences from the balance sheet to show the earnings of the company without the unusual event

• This can be misleading because it is important for the person examining the financial statements to see what really happened – the ‘real bottom line’ for the year especially if it involved writing down assets, costs of restructuring, impact of asset sales.
• By normalising earnings you distort the real accounting figures

- Sometimes these one-off figures are explicitly taken out of financial reports

• E.g, the impact of a cyclone in far north QLD on banana growers as it makes their financial statements look healthier. Additionally, the cost of the clean up after the cyclone is not included; in reality these costs should be included (COVID is another example)

- Avoiding a false impression of less profitability than it should have


^this was in my notes but idk if u'll understand better

 

[aqwerty13402]

Normalised earnings
- Process of removing one-time influences from the balance sheet such as special circumstances or economic upswing/downswing

• Removal of a land sale (outlier as you are not selling land everyday), which would achieve a large capital gain + distort the business’s true earnings

- * A company normalises its earnings to avoid including unusual events that create a false impression*
- Purpose - To provide a more realistic assessment of the earning performance of a business

- Businesses often report normalised earnings – where they remove the impact of inflation and one-off or unusual influences from the balance sheet to show the earnings of the company without the unusual event

• This can be misleading because it is important for the person examining the financial statements to see what really happened – the ‘real bottom line’ for the year especially if it involved writing down assets, costs of restructuring, impact of asset sales.
• By normalising earnings you distort the real accounting figures

- Sometimes these one-off figures are explicitly taken out of financial reports

• E.g, the impact of a cyclone in far north QLD on banana growers as it makes their financial statements look healthier. Additionally, the cost of the clean up after the cyclone is not included; in reality these costs should be included (COVID is another example)

- Avoiding a false impression of less profitability than it should have


^this was in my notes but idk if u'll understand better

Okay so your notes indicate that the lilmitation is the distortion of accuracy. That's what I had in my head. Thank you. I'll keep checking with the teachers but if i get asked this im just gonna write it along these lines. Thank you