For its fiscal year ending October 31, 2012, Reed Corporation reports the following partial data shown below.
Income before income taxes $540,000
Income tax expense (30% 3 $390,000) 117,000
Income before extraordinary items 423,000
Extraordinary loss from flood 150,000
Net income $273,000
The flood loss is considered an extraordinary item. The income tax rate is 30% on all items.
(a) Prepare a correct income statement, beginning with income before income taxes.
(b) Explain in memo form why the income statement data are misleading.