Final answer:
One-time gains used to boost operating income create the impression that operating income is higher than it actually is from ongoing business activities. This can mislead financial statement users who are evaluating the company's operational performance and long-term profitability.
Step-by-step explanation:
The correct option : a
The use of one-time gains to boost operating income can mislead users of financial statements into believing that the operating income is higher than it truly is. By including these gains, which are not repeatable and not part of the core business operations, in their income figures, companies can temporarily inflate their performance. This can be problematic for users such as investors and creditors who are trying to assess the ongoing profitability and risk profile of the business.
These one-time gains can come from various non-operating sources, such as the sale of an asset, settlement of a lawsuit, or an insurance payout. These are not reflective of the company's operational earnings, which are generated from the company's main business activities. When these gains are included in operating income, it presents a distorted view of the company's regular, sustainable earnings capacity.Therefore, it's critical for users of financial statements to separate one-time gains from the results of core business operations to understand the actual performance of the business. Many financial analysts and sophisticated investors will adjust the company's earnings to exclude these one-time items to get a truer picture of the company's operating performance.