General-purpose financial statements
A discontinued operations CPA exam item is almost never a question about whether a component qualifies. It is a question about presentation: everything about the component — its operating results and the gain or loss on disposal together — goes on one line, below income from continuing operations, net of its own tax effect. Candidates who split the disposal gain out of the component, or who report the line gross, get a number that looks defensible and is wrong.
| Blueprint group | FAR-I-A |
| Area weight | 30–40% |
| Approx. share of the exam | 5.8% |
What the Blueprint asks for here
At this group the Blueprint expects a candidate to prepare and adjust a complete set of general-purpose financial statements for a for-profit business entity, including the balance sheet, the income statement, the statement of comprehensive income, the statement of changes in equity and the statement of cash flows, and to determine how items such as discontinued operations are presented within them.
This is our paraphrase, not the Blueprint’s wording. verbatim quote pending The authoritative representative-task text is in the AICPA Blueprints, which are published free — download them and read the group directly. We will not print a quotation we have not taken from the source document.
Discontinued operations CPA exam items, and income statement presentation in FAR
Why this group is worth its weight
This is the largest group in Area I and the one whose material a candidate is most likely to feel they already know, because it is the material an accounting degree spends the most time on. That feeling is the trap. Preparing a statement in coursework and answering a presentation question in four minutes are different skills, and the exam tests the second one: given a set of facts, which line does this belong on, gross or net, above or below which subtotal.
The presentation questions that actually get asked
Four decisions carry most of the items in this group. Which subtotal — continuing operations, discontinued operations, or other comprehensive income. Gross or net of tax — discontinued operations and each component of other comprehensive income are presented net of their own tax effect, while items inside continuing operations are not. Which period — a reclassification changes prior-period columns; a change in estimate does not. And what travels with the component: once a disposal group qualifies as discontinued, its operating results for the period and the gain or loss on its disposal are reported together, not in two places.
Where other comprehensive income sits in this
Unrealised gains and losses on available-for-sale debt securities, certain pension adjustments and foreign currency translation adjustments are reported in other comprehensive income rather than in net income, and they are reclassified into net income when realised. The exam likes this boundary because it produces a plausible wrong answer on almost any fact pattern: route an unrealised gain through net income and every subtotal below it is wrong while every individual number is arithmetically fine.
What separates a candidate page from a practitioner one
Practitioner reference material on presentation is written for someone who already knows which question they are answering and needs the authoritative wording. A candidate has the opposite problem: the wording is not the hard part, deciding which of four defensible presentations the fact pattern is asking for is. That is why the item below is followed by the specific misconception each wrong option encodes rather than by a restatement of the rule.
The standard this group is examined on is published by the standard setter: FASB Accounting Standards Codification. The Blueprint coordinates and weight ranges above come from the AICPA Blueprints. What is ours, and labelled as ours, is the reading, the practice item and the misconception tags.
A practice item
our own practice item Written by us against the public Blueprint. It is not an AICPA question and it is not taken from any review course.
During Year 5 a company committed to a plan to sell a component that qualifies for reporting as a discontinued operation, and completed the sale before year end. The component had a pre-tax operating loss of $200,000 for the year, and the sale produced a pre-tax gain on disposal of $50,000. The company’s effective tax rate is 25%.
What amount should be reported as “discontinued operations” on the Year 5 income statement?
| A | $(150,000) | |
| B | $(112,500) | correct |
| C | $37,500 | |
| D | $(200,000) |
The rule
When a component qualifies as a discontinued operation, its results of operations for the period and any gain or loss recognised on its disposal are reported together in the discontinued operations section of the income statement, presented net of the income tax effect that relates to them, and shown below income from continuing operations.
The arithmetic
The two pre-tax component amounts combine first: a $200,000 operating loss and a $50,000 disposal gain give a pre-tax loss of $150,000. That amount is then presented net of its own tax effect at 25%: $150,000 × 0.75 = $112,500, reported as a loss. $(112,500).
What we would ask you first
This is the part of the product that is hard to show without an account, so here it is directly: for each wrong option above, the opening question our tutor asks — before any explanation — targeting the specific mistake that option represents. Choosing A ($(150,000)) and choosing D ($(200,000)) are different errors and deserve different first questions.
If you chose A — tax_effect_omitted
“Your figure combines the two component amounts correctly, so the harder half is already right. Look at where this line sits relative to the income tax expense line on the statement — is there any tax left below it to apply?”
If you chose C — gain_split_from_component
“You have taxed something at 25%, and $37,500 is exactly three quarters of one of the two amounts in this problem. Which one did you keep, and where did you put the other one?”
If you chose D — operations_only
“Your figure is the component’s operating result on its own, untaxed. Two separate things have been left out of it. Name them both before deciding which matters more.”
To be precise about what happens next: the exchange is a rate limit, not a gate. Answering well gets you to the full worked explanation in three or four exchanges; answering badly still gets you there. And if you would rather skip it, asking three times gets you the walkthrough.
Common questions
How are discontinued operations presented on the income statement?
As a single section below income from continuing operations, presented net of the income tax that relates to it. The component's results of operations for the period and the gain or loss on its disposal are reported together in that section, not split between discontinued and continuing operations.
Is the discontinued operations line before or after tax?
After. The line is net of its own tax effect, which is why it sits below the income tax expense line that belongs to continuing operations. Items reported within continuing operations are presented pre-tax and are covered by that single tax expense line.
Misconception tags in this group
These are the labels our diagnosis attaches when a wrong answer matches a known pattern. They are worth reading even if you never use the product — naming your own error is most of the work.
tax_effect_omitted— Reporting discontinued operations gross rather than net of the tax that relates to it.gain_split_from_component— Reporting the disposal gain separately and leaving the component's operating results in continuing operations.operations_only— Reporting only the component's operating results and omitting the disposal outcome.oci_routed_through_net_income— Running an unrealised available-for-sale gain through net income instead of other comprehensive income.