© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin lide 2-1 INCOME AND CHANGES IN RETAINED EARNINGS Chapte r 12
© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-1 INCOME AND CHANGES IN RETAINED EARNINGS Chapter 12.
Dec 25, 2015
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© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-1
INCOME AND CHANGES IN RETAINED EARNINGS
Chapter
12
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-2
Reporting the Results of OperationsReporting the Results of Operations
Information about net income can be divided into two major categories
Information about net income can be divided into two major categories
Income from continuing operations.
Income from continuing operations.
1. The results of
discontinued operations
1. The results of
discontinued operations
2. The impact of
extraordinary items.
2. The impact of
extraordinary items.
3. The effects of changes in
accounting principles.
3. The effects of changes in
accounting principles.
Normal, recurring revenue and expense transactions.
Normal, recurring revenue and expense transactions.
Unusual, nonrecurring events that affect net income.
Unusual, nonrecurring events that affect net income.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-3
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-4
Discontinued Operations
Income/Loss from operating the segment
prior to disposal.
Income/Loss on disposal of the segment.
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement.
When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement.
Discontinued OperationsDiscontinued Operations
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-5
Extraordinary ItemsExtraordinary Items
Material in amount.Gains or losses that
are both unusual in nature and not expected to recur in the foreseeable future.
Reported net of related taxes.
Material in amount.Gains or losses that
are both unusual in nature and not expected to recur in the foreseeable future.
Reported net of related taxes.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-6
Change in Accounting PrincipleChange in Accounting Principle
Occurs when changing from one GAAP method to another GAAP method.
Make a catch-up adjustment known as the cumulative effect of a change in accounting principle.
The cumulative effect is reported net of taxes and after extraordinary items.
Occurs when changing from one GAAP method to another GAAP method.
Make a catch-up adjustment known as the cumulative effect of a change in accounting principle.
The cumulative effect is reported net of taxes and after extraordinary items.
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-7
A measure of the company’s profitability and earning power for the period.
A measure of the company’s profitability and earning power for the period.
Based on the number of shares issued and the length of time
that number remained unchanged.
Based on the number of shares issued and the length of time
that number remained unchanged.
Earnings Per Share (EPS)Earnings Per Share (EPS)
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-8
Remember that Apex Co. income from continuing operations of $350,000. The
after-tax loss from discontinued operations was $175,000. The extraordinary loss was
$52,500 and the cumulative effect of accounting changes was a gain of $45,500.
Assume that Apex has weighted average shares outstanding of 156,250. Prepare a partial income statement showing the EPS
for Income from Operations and for the other special items.
Remember that Apex Co. income from continuing operations of $350,000. The
after-tax loss from discontinued operations was $175,000. The extraordinary loss was
$52,500 and the cumulative effect of accounting changes was a gain of $45,500.
Assume that Apex has weighted average shares outstanding of 156,250. Prepare a partial income statement showing the EPS
for Income from Operations and for the other special items.
Earnings Per Share (EPS) -Partial Income Statement
Earnings Per Share (EPS) -Partial Income Statement
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-9
* Rounded.
Earnings Per Share (EPS) -Partial Income Statement
Earnings Per Share (EPS) -Partial Income Statement
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-10
If preferred stock is present, subtract preferred dividends from net income prior to computing EPS.
If preferred stock is present, subtract preferred dividends from net income prior to computing EPS.
EPS is required to be reported in the income statement.
Earnings Per Share (EPS)Earnings Per Share (EPS)
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-11
Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price.
Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price.
Price-earnings Ratio (P/E)Price-earnings Ratio (P/E)
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-12
Declared by board of directors.
Declared by board of directors.
Not legally required.
Not legally required.
Creates liability at declaration.
Creates liability at declaration.
Requires sufficient Retained Earnings
and Cash.
Requires sufficient Retained Earnings
and Cash.
Accounting for Cash DividendsAccounting for Cash Dividends
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-13
Date of Declaration Board of directors declares the dividend. Record a liability.
Date of Declaration Board of directors declares the dividend. Record a liability.
Dividend DatesDividend Dates
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-14
Date of Record Stockholders holding shares on this date
will receive the dividend. (No entry)
Date of Record Stockholders holding shares on this date
will receive the dividend. (No entry)
Dividend DatesDividend Dates
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-15
Date of Payment Record the payment of the dividend to
stockholders.
Date of Payment Record the payment of the dividend to
stockholders.
Dividend DatesDividend Dates
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-16
On June 1, 2001, a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
On June 1, 2001, a corporation’s board of directors declared a dividend for the 2,500 shares
of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry?
a. Debit Retained Earnings $20,000.
b. Debit Dividends Payable $20,000.
c. Credit Dividends Payable $20,000.
d. Credit Preferred Stock $20,000.
Dividend Dates - QuestionDividend Dates - Question
$100 × 8% = $8 dividend per share
$8 × 2,500 = $20,000 total dividend
$100 × 8% = $8 dividend per share
$8 × 2,500 = $20,000 total dividend
© The McGraw-Hill Companies, Inc., 2003McGraw-Hill/Irwin
Slide 12-17
All stockholders retain same percentage ownership.
All stockholders retain same percentage ownership.
No change in total stockholders’ equity.
No change in total stockholders’ equity.
No change in par values.
No change in par values.
Distribution of additional shares of stock to stockholders.
Distribution of additional shares of stock to stockholders.
Accounting for Stock DividendsAccounting for Stock Dividends
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