Normalizing an Income Statement: Key Adjustments for Reliable Analysis

Written by Kelly Bailey

Reviewed by Jeff Schmidt

Read Time 6 minutes

Why Normalizing an Income Statement Matters in Financial Analysis

Strong financial analysis starts with a clear view of a company’s real earnings. But one-time gains and losses — known as non-recurring items — can distort financial statements, making it harder for you to assess financial results. That’s why you need to normalize income statements to remove these distortions, ensuring a clearer picture of ongoing business performance.

By adjusting for non-recurring items, you can build more reliable financial models for valuation and forecasting. In some cases, you may also adjust for recurring expenses to improve comparability across companies.

This guide walks you through the key adjustments you need to make to normalize an income statement effectively.

Normalizing Income Statements - Course Introduction — Source: CFI’s **Normalizing Income Statements** course

Key Highlights

Normalizing an income statement removes distortions from non-recurring gains or losses, like M&A or litigation expenses, for a clearer picture of ongoing business performance.

Identifying non-recurring items requires a solid understanding of accounting and the ability to analyze financial statements with a critical eye.

Analysts sometimes adjust for recurring expenses, like amortization or stock-based compensation, to improve comparability across companies.

Identify Non-Recurring Items

The first step in normalizing an income statement is identifying non-recurring items — but this isn’t always straightforward.

Finding these items requires a solid understanding of accounting and the ability to analyze financial statements with a critical eye. Some one-time items are obvious, like a large lawsuit settlement, but others are buried deep in financial reports.

The good news? Companies are usually willing to tell you what they think requires adjusting. Nearly every company in the S&P 500 reports adjusting items to present a “cleaner” version of earnings. These are typically labeled as:

Non-GAAP adjustments (U.S. companies, under Generally Accepted Accounting Principles)
Non-IFRS adjustments (International companies, under International Financial Reporting Standards)

Where to Find Non-Recurring Items

Non-recurring items are often disclosed in:

Income statements — Sometimes listed as things like “Goodwill Impairment.”
Footnotes in financial reports — Look for detailed explanations of line items and adjustments.
Investor presentations and earnings calls — Companies often highlight financial adjustments for analysts.

Normalizing Income Statements - Finding Adjustable Items — Source: CFI’s **Normalizing Income Statements** course

Common Non-Recurring Adjustments

Once you’ve identified non-recurring items, the next step is to understand why these adjustments matter and how they affect financial analysis.

Non-recurring items can significantly impact a company’s earnings, making it seem more or less profitable than it actually is. By adjusting for these events, analysts ensure that a company’s financial performance reflects only its ongoing operations and not temporary fluctuations.

Companies frequently report adjustments to their financials, either due to one-time charges (like a major lawsuit settlement) or accounting rules that may not fully capture financial reality.

The table below presents the most common types of non-recurring adjustments and how they affect the income statement.

Common Non-Recurring Items

Non-Recurring Adjustment	Definition	Financial Impact
Restructuring Costs	Expenses from layoffs, closures, or reorganizations	Temporary increase in expenses, lowers net income
Mergers & Acquisitions (M&A) Costs	One-time legal, advisory, and integration costs	Increases expenses, lowers net income
Litigation or Regulatory Gains/Losses	Lawsuit settlements or government fines	Can either increase or decrease net income
Gains/Losses on Asset Sales	Profit or loss from selling non-operating assets	Creates one-time income or loss
Impairments and Reversals	Write-down or recovery of asset value	Reduces or increases reported earnings
Early Debt Extinguishment	Costs incurred when repaying loans early	One-time loss due to prepayment penalties
Discontinued Operations	Business segments being sold or shut down	Must be removed to assess ongoing operations

Once these non-recurring items are identified, they must be removed or adjusted in financial models using the following steps:

Find the reported income statement figures.
Remove non-recurring expenses to isolate ongoing costs.
Exclude one-time gains that artificially inflate net income.
Adjust EBITDA and net profit margins accordingly.

Ready to master income statement adjustments and normalization? Enroll in CFI’s expert-led Normalizing Income Statements course!

Making Other Adjustments for Recurring Expenses

Analysts sometimes adjust for recurring expenses to improve comparability across companies. These adjustments don’t eliminate one-time distortions but instead align accounting treatments across different companies.

Why Do Analysts Make These Adjustments?

Even though the following items appear on the income statement every year, they may distort financial comparisons due to differences in accounting treatment. Companies often encourage analysts to adjust for them so that financial metrics better reflect economic reality and increase comparability.

The table below provides a breakdown of common recurring adjustments and the reasons why these items need adjusting.

Common Recurring Adjustments

Recurring Adjustment	Why It’s Adjusted
Stock-Based Compensation	Non-cash expense, affects EPS but not cash flow
Amortization of Acquired Intangibles	Creates inconsistencies between companies that acquire vs. internally develop assets
Amortization of Debt Discounts	Non-cash accounting expense, does not impact actual interest payments
LIFO vs. FIFO Adjustments	Ensures comparability between companies using different inventory accounting methods

Adjust for Tax Implications

Once non-recurring items have been removed, there’s one more critical adjustment — taxes. Since many of the items analysts adjust are tax-deductible expenses, removing them increases taxable income, which means taxes must be adjusted accordingly.

Conversely, if a company’s reported income includes one-time gains, then removing them lowers taxable income, requiring a downward tax adjustment.

Ignoring tax implications can lead to inaccurate financial models. If analysts remove a large non-recurring expense but fail to increase tax expenses accordingly, they overstate adjusted net income.

Example: Adjusting for a Large Non-Recurring Expense

A company reports a $933 million non-recurring expense in its financials. If this expense is removed, the tax adjustment must reflect the additional taxable income.

Assuming a 25% tax rate, the tax adjustment is calculated as:

$933M × 25%= $233M

This means $233 million in additional tax expense should be accounted for in the normalized income statement.

By correctly adjusting for taxes, analysts ensure that normalized net income reflects post-tax profitability, leading to more accurate comparisons and valuation models.

Normalizing Income Statements - Tax Implications — Source: CFI’s **Normalizing Income Statements** course

Review the Final Normalized Income Statement

Now that we’ve removed non-recurring items and adjusted taxes, we can calculate the final normalized net income and assess a company’s true ongoing profitability.

Note that normalization directly impacts key financial metrics, including:

Net income margin — Measures profitability as a percentage of revenue.
EBITDA margin — Shows operating profitability before accounting for interest, taxes, depreciation, and amortization.
Leverage ratio (Net Debt/EBITDA) — Evaluates a company’s financial health and debt burden.

A company’s reported earnings might make it look more or less profitable than it truly is. Normalization ensures analysts can:

Compare profitability across companies and industries without one-time distortions.
Assess long-term financial performance by focusing on ongoing operations.
Ensure accurate valuation models by using reliable earnings figures.

Real-World Example: Normalizing Albertsons’ Income Statement

Albertsons, a U.S. grocery chain, follows GAAP and includes several non-recurring items in its income statements. Analysts must adjust for these items to compare Albertsons’ profitability with competitors that follow different accounting standards (e.g., those using FIFO instead of LIFO for inventory valuation).

Albertsons Consolidated Statements of Operations and Comprehensive Income — Source: **Albertsons FYE 2024 Form 10-K**

Key Adjustments to Albertsons’ Financials:

Loss/Gain on Property Dispositions and Impairments
- Albertsons records gains or losses from selling real estate and impairments on certain assets. These are not part of its core grocery business, so analysts adjust for them.
Loss on Debt Extinguishment
- The company refinanced its debt and incurred early repayment costs. Since this is a one-time event, it is removed from normalized earnings.
LIFO Expense Adjustment
- Albertsons reports inventory using LIFO (Last-In, First-Out), which impacts cost of goods sold and net income. Since most international retailers use FIFO (First-In, First-Out), analysts adjust Albertsons’ financials to make comparisons fair.

By making these adjustments, analysts ensure that Albertsons’ earnings reflect ongoing operations, making it easier to compare against competitors that use different accounting methods.

Ready for hands-on practice by normalizing real companies’ income statements? Enroll in CFI’s expert-led Normalizing Income Statements course!

Apply Normalized Income Statements to Real-World Financial Analysis

Understanding how to normalize an income statement is critical for financial analysts, investors, and corporate finance professionals. Whether you’re analyzing a company for investment, building financial projections, or conducting due diligence, normalized income statements give you a more accurate foundation for decision-making.

Ready to dive deeper into normalizing income statements? Enroll in CFI’s Normalizing Income Statements course for expert instruction in analyzing and adjusting income statements for accurate financial analysis and decision-making.

Enroll in Normalizing Income Statements Now!