?The McGraw-Hill Companies,Inc.,1999
Slide
12-1
Irwin/McGraw-Hill
Chapter 12
Income and Changes in Retained
Earnings
The McGraw-Hill Companies,Inc.,1999
Slide
12-2
Irwin/McGraw-Hill
Reporting the Results of Operations
I n c o m e
fr o m
c o n ti n u i n g
o p e r a ti o n s,
N o r m a l,r e c u r r i n g
r e v e n u e a n d e x p e n s e
t r a n s a c t i o n s,
1, T h e r e s u l ts o f
d i s c o n ti n u e d
o p e r a ti o n s,
2, T h e i m p a c t o f
e x tr a o r d i n a r y
i te m s,
3, T h e e ff e c ts o f
c h a n g e s i n
a c c o u n ti n g
p r i n c i p l e s,
U nu s ua l,no nr e c ur r i ng
e v e nt s t ha t a f f e c t
ne t i nc om e,
I nf orm a t i on a bo ut ne t i nc om e i s us e d
by i nv e s t or s,c r e di t or s,a nd ot he r
f i na nc i a l s t a t e m e nt us e r s,
The McGraw-Hill Companies,Inc.,1999
Slide
12-3
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
12-4
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
This tax expense
does not include
effects of unusual,
nonrecurring items.
The McGraw-Hill Companies,Inc.,1999
Slide
12-5
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
These unusual,
nonrecurring items are
each reported net of
taxes.
The McGraw-Hill Companies,Inc.,1999
Slide
12-6
Irwin/McGraw-Hill
Discontinued Operations
Income/Loss from
operating the segment
prior to disposal.Discontinued
Operations
Income/Loss on disposal
of the segment.
When management enters into a formal plan to sell or
discontinue a segment of the business.
The McGraw-Hill Companies,Inc.,1999
Slide
12-7
Irwin/McGraw-Hill
Discontinued Operations
When management enters into a formal plan to sell or
discontinue a segment of the business.
A segment must be a separate line
of business activity or an operation
that services a distinct category of
customers.
The McGraw-Hill Companies,Inc.,1999
Slide
12-8
Irwin/McGraw-Hill
During 2000,Apex Co,sold an unprofitable
segment of the company,The segment had a
net loss from operations during the period of
$150,000 and its assets sold at a loss of
$100,000,Apex reported income from
continuing operations of $350,000,All items
are taxed at 30%,
How will this appear on the income
statement?
Discontinued Operations
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-9
Irwin/McGraw-Hill
Discontinued Operations Example
Los s on s e gm e nt ope r a t i ons ( 1 5 0,0 0 0 )$
Le s s, Ta x be ne f i t s ( $ 1 5 0,0 0 0? 3 0 % ) 4 5,0 0 0
N e t l os s ( 1 0 5,0 0 0 )$
Los s on di s pos a l of a s s e t s ( 1 0 0,0 0 0 )$
Le s s, Ta x be ne f i t s ( $ 1 0 0,0 0 0? 3 0 % ) 3 0,0 0 0
N e t l os s ( 7 0,0 0 0 )$
The McGraw-Hill Companies,Inc.,1999
Slide
12-10
Irwin/McGraw-Hill
I n c o m e f r o m c o n t i n u i n g o p e r a t i o n s 3 5 0,0 0 0$
D i s c o n t i n u e d o p e r a t i o n s,
L o s s o n o p e r a t io n s ( n e t o f
t a x b e n e f it o f $ 4 5,0 0 0 ) ( 1 0 5,0 0 0 )
L o s s o n d is p o s a l o f a s s e t s ( n e t
o f t a x b e n e f it s o f $ 3 0,0 0 0 ) ( 7 0,0 0 0 )
E a r n i n g s b e f o r e e x t r a o r d i n a r y i t e m 1 7 5,0 0 0$
Income Statement Presentati n:
Discontinued Operations Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-11
Irwin/McGraw-Hill
?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.
Extraordinary Items
The McGraw-Hill Companies,Inc.,1999
Slide
12-12
Irwin/McGraw-Hill
During 2000,Apex Co,experienced a loss of
$75,000 due to an earthquake at one of its
manufacturing plants in Nashville,This was
considered an extraordinary item,The
company reported income before
extraordinary item of $175,000,All gains
and losses are subject to a 30% tax rate.
How would this item appear on the 2000
income statement?
Extraordinary Items
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-13
Irwin/McGraw-Hill
Extraordinary Items
Example
E x t r a o r d i n a r y L o s s ( 7 5,0 0 0 )$
L e s s, T a x B e n e f i t s
( $ 7 5,0 0 0? 3 0 % ) 2 2,5 0 0
N e t L o s s ( 5 2,5 0 0 )$
The McGraw-Hill Companies,Inc.,1999
Slide
12-14
Irwin/McGraw-Hill
E x t r a o r d i n a r y L o s s ( 7 5,0 0 0 )$
L e s s, T a x B e n e f i t s
( $ 7 5,0 0 0? 3 0 % ) 2 2,5 0 0
N e t L o s s ( 5 2,5 0 0 )$
E a r ni ngs be f or e e x t r a or di na r y i t e m 1 7 5,0 0 0$
E x t r a or di na r y Los s,
E a r t hqu a k e l os s
( ne t of t a x be ne f i t of $ 2 2,5 0 0 ) ( 5 2,5 0 0 )
E a r ni ngs be f or e c um ul a t i v e e f f e c t of
a c ha nge i n a c c oun t i ng pr i nc i pl e 1 2 2,5 0 0$
Income Statement Presentation:
Extraordinary Items
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-15
Irwin/McGraw-Hill
T yp e o f A cc o u n t i n g
C h an g e D ef i n i t i o n
C h a n g e i n A c c o u n ti n g
P r i n c i p l e
R e p l a c e s o n e G A A P w i th
a n o th e r
C h a n g e i n A c c o u n ti n g
E s ti m a te
R e v i s i o n o f a n e s ti m a te
b e c a u s e o f n e w
i n fo r m a ti o n o r n e w
e x p e r i e n c e
Accounting Changes
The McGraw-Hill Companies,Inc.,1999
Slide
12-16
Irwin/McGraw-Hill
Change 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.
The McGraw-Hill Companies,Inc.,1999
Slide
12-17
Irwin/McGraw-Hill
Change in Accounting Principle
Example
Also in 2000,Apex Co,decided to change from
the double-declining balance to the straight-line
method for depreciation,The effect of this
change is an increase in net income of $65,000,
Apex reported income before cumulative effect
of an accounting change of $122,500 during the
year,All items of income are subject to a 30%
tax rate.
How would this item appear on the income
statement?
The McGraw-Hill Companies,Inc.,1999
Slide
12-18
Irwin/McGraw-Hill
Change in Accounting Principle
Example
I nc r e a s e i n i nc om e 6 5,0 0 0$
Le s s, Ta x e x pe ns e ( $ 6 5,0 0 0? 3 0 % ) ( 1 9,5 0 0 )
N e t i nc r e a s e i n i nc om e 4 5,5 0 0$
Computation:
The McGraw-Hill Companies,Inc.,1999
Slide
12-19
Irwin/McGraw-Hill
I nc r e a s e i n i nc om e 6 5,0 0 0$
Le s s, Ta x e x pe ns e ( $ 6 5,0 0 0? 3 0 % ) ( 1 9,5 0 0 )
N e t i nc r e a s e i n i nc om e 4 5,5 0 0$
Computation:
E a r ni ng s be f ore c um ul a t i v e e f f e c t of
a c ha ng e i n a c c ou nt i ng pri nc i pl e 1 2 2,5 0 0$
C um ul a t i v e e f f e c t of c ha ng e i n
a c c ou nt i ng pri nc i pl e,
C ha ng e i n a c c ou nt i ng m e t ho d
( ne t of $ 1 9,5 0 0 t a x e x pe ns e ) 4 5,5 0 0
N e t I nc om e 1 6 8,0 0 0$
Income Statement Presentation:
Change in Accounting Principle
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-20
Irwin/McGraw-Hill
Change in Estimates
?Revision of a previous
accounting estimate.
?The new estimate
should be used in the
current and future
periods.
?The prior accounting
results should not be
disturbed.
The McGraw-Hill Companies,Inc.,1999
Slide
12-21
Irwin/McGraw-Hill
Change in Estimates
Example
On January 1,1997,we purchased
equipment costing $30,000,with a useful
life of 10 years and no salvage value,
During 2000,we determine that the
remaining useful is 5 years (8-year total
life),We use straight-line depreciation.
Compute the revised depreciation expense
for 2000.
The McGraw-Hill Companies,Inc.,1999
Slide
12-22
Irwin/McGraw-Hill
A s s e t c o s t 3 0,0 0 0$
A c c u m u l a t e d d e p r e c i a t i o n
1 2 / 3 1 / 9 9 - ( $ 3,0 0 0? 3 y e a r s ) ( 9,0 0 0 )
R e m a i n i n g t o b e d e p r e c i a t e d 2 1,0 0 0$
R e m a i n i n g u s e f u l l i f e? 5 y e a r s
R e v i s e d a n n u a l d e p r e c i a t i o n 4,2 0 0$
Record depreciation expense of $4,200 for
2000 and subsequent years.
Change in Estimates
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-23
Irwin/McGraw-Hill
Let’s
move on
to a few
final
topics.
The McGraw-Hill Companies,Inc.,1999
Slide
12-24
Irwin/McGraw-Hill
Price-earnings Ratio (P/E)
Often,the Price-Earnings Ratio is used to evaluate
the reasonableness of a company抯 stock price.
P r i c e - E a r n i n g s
R a t i o =
C u r r e n t S t o c k
P r i c e
E a r n i n g s P e r
S h a r e
Let’s examine this
further.
The McGraw-Hill Companies,Inc.,1999
Slide
12-25
Irwin/McGraw-Hill
Earnings Per Share (EPS)
A measure of the company抯 profitability and
earning power for the period.
E a r n i n g s
P e r S h a r e
=
N e t
I n c o m e
W e i g h t e d A v e r a g e
N u m b e r o f S h a r e s
O u t s t a n d i n g
Based on the number of shares
issued and the length of time
that number remained
unchanged.
The McGraw-Hill Companies,Inc.,1999
Slide
12-26
Irwin/McGraw-Hill
Earnings Per Share (EPS) -
Partial Income Statement
Use the information from Apex Co,that
was generated earlier,Assume that
Apex has weighted average shares
outstanding of 156,250,
Prepare a partial income statement
showing the EPS for Income from
Operations and for the other special
items,
The McGraw-Hill Companies,Inc.,1999
Slide
12-27
Irwin/McGraw-Hill
Earnings Per Share (EPS) -
Partial Income Statement
I nc om e
S t a t e m e nt
A m ount s E P S
I nc om e f r om c ont i nui ng ope r a t i ons 3 5 0,0 0 0$ 2, 2 4$
Los s f r om di s c ont i nue d ope r a t i ons ( 1 7 5,0 0 0 ) ( 1, 1 2 )
Los s be f or e e x t r a or di na r y i t e m s a nd
c um ul a t i v e e f f e c t of a c c ount i ng c ha nge 1 7 5,0 0 0$ 3, 3 6$
E x t r a or di na r y l os s ( 5 2,5 0 0 ) ( 0, 3 4 )
C um ul a t i v e e f f e c t of a c c ount i ng c ha nge 4 5,5 0 0 0, 2 9
N e t Los s 1 6 8,0 0 0$ 3, 3 2$ *
* Rounding error.
The McGraw-Hill Companies,Inc.,1999
Slide
12-28
Irwin/McGraw-Hill
Earnings Per Share (EPS)
If preferred stock is present,subtract preferred
dividends from net income prior to computing EPS.
N e t I n c o m e - P r e fe r r e d D i v i d e n d s
W e i g h te d A v e r a g e N u m b e r o f
C o m m o n S h a r e s O u ts ta n d i n g
E a r n i n g s
P e r S h a r e
=
EPS is required to be reported
in the income statement.
The McGraw-Hill Companies,Inc.,1999
Slide
12-29
Irwin/McGraw-Hill
Accounting for Cash Dividends
Declared by board
of directors.
Not legally
required.
Creates liability
at declaration.
Requires sufficient
Retained Earnings
and Cash.
The McGraw-Hill Companies,Inc.,1999
Slide
12-30
Irwin/McGraw-Hill
Dividend Dates
Date of Declaration
? Board of directors declares the dividend.
? Record a liability,
D a t e D e s c r i pt i on D e bi t C r e di t
D i v i d e n d s $$$$
D i v i d e n d s P a y a b l e $$$$
The McGraw-Hill Companies,Inc.,1999
Slide
12-31
Irwin/McGraw-Hill
Dividend Dates
Ex-Dividend Date
? The day which serves as the ownership
cut-off point for the receipt of the most
recently declared dividend.
D a t e D e s c r i pt i on D e bi t C r e di t
N O E N T R Y R E Q U I R E D
The McGraw-Hill Companies,Inc.,1999
Slide
12-32
Irwin/McGraw-Hill
Dividend Dates
X
Date of Record
? Stockholders holding shares on this date
will receive the dividend,(No entry)
The McGraw-Hill Companies,Inc.,1999
Slide
12-33
Irwin/McGraw-Hill
Date of Payment
? Record the payment of the dividend to
stockholders.
Dividend Dates
D a t e D e s c r i pt i on D e bi t C r e di t
D i v i d e n d s P a y a b l e $$$$
C a s h $$$$
The McGraw-Hill Companies,Inc.,1999
Slide
12-34
Irwin/McGraw-Hill
Dividend Dates
Question
On June 1,1999 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,
The McGraw-Hill Companies,Inc.,1999
Slide
12-35
Irwin/McGraw-Hill
On June 1,1999 a corporation抯 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
Question
$100?8% = $8 dividend per share
$8?2,500 = $20,000 total dividend
D a t e D e s c r i pt i on D e bi t C r e di t
1 5 - J u l D i v i d e n d s P a y a b l e 2 0,0 0 0
C a s h 2 0,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
12-36
Irwin/McGraw-Hill
Accounting for Stock Dividends
No change in total
stockholders?equity.
All stockholders
retain same
percentage
ownership.
No change in par
values.
Distribution of additional shares of stock to
stockholders.
The McGraw-Hill Companies,Inc.,1999
Slide
12-37
Irwin/McGraw-Hill
Summary of Effects of Stock
Dividends and Stock Splits
Sm a l l St o c k
D i v i d e n d
L a r g e St o c k
D i v i d e n d
St o c k Sp l i ts
T o ta l
St o c k h o l d e r s '
Eq u i ty
N o Ef fe c t N o Ef fe c t N o Ef fe c t
C o m m o n St o c k I n c r e a s e s I n c r e a s e s N o Ef fe c t
Pa i d -i n C a p i ta l I n c r e a s e s N o Ef fe c t N o Ef fe c t
R e ta i n e d Ea r n i n g s D e c r e a s e s D e c r e a s e s N o Ef fe c t
N u m b e r o f Sh a r e s
O u ts ta n d i n g
I n c r e a s e s I n c r e a s e s I n c r e a s e s
Pa r V a l u e p e r
Sh a r e
N o Ef fe c t N o Ef fe c t D e c r e a s e s
The McGraw-Hill Companies,Inc.,1999
Slide
12-38
Irwin/McGraw-Hill
Prior Period Adjustments
Adjust retained
earnings retroactively.
The adjustment
should be disclosed
net of any taxes.
The correction of an error identified as
affecting net income in a prior period.
The McGraw-Hill Companies,Inc.,1999
Slide
12-39
Irwin/McGraw-Hill
Comprehensive Income
I s s u a n c e o f n e w
s h a re s o f s t o c k,
N e t I n c o m e o r
N e t L o s s
P a y m e n t o f
D i v i d e n d s
N o rm a l l y,t h e re a re 3 w a y s
t h a t f i n a n c i a l p o s i t i o n c a n c h a n g e,
The McGraw-Hill Companies,Inc.,1999
Slide
12-40
Irwin/McGraw-Hill
Comprehensive Income
I s s u a n c e o f n e w
s h a re s o f s t o c k,
N e t I n c o m e o r
N e t L o s s
P a y m e n t o f
D i v i d e n d s
N o rm a l l y,t h e re a re 3 w a y s
t h a t f i n a n c i a l p o s i t i o n c a n c h a n g e,
GAAP excludes some unrealized items from
income,such as the change in market value of
available-for-sale debt and equity investments.
The McGraw-Hill Companies,Inc.,1999
Slide
12-41
Irwin/McGraw-Hill
Comprehensive Income
T h e a c c u m u l a t e d a m o u n t
o f c h a n g e s a f f e c t i n g
C o m p re h e n s i v e I n c o m e
i s re p o rt e d i n e q u i t y,
A s a s e c o n d
i n c o m e s t a t e m e n t,
C om bi ne d w i t h
n e t i n c o m e o n
t he I nc om e
S t a t e m e n t,
A s a n e l e m e n t
o f s t o c k h o l d e rs '
e q u i t y,
T h e re a re 3 o p t i o n s
f o r re p o rt i n g
C o m p re h e n s i v e I n c o m e
G A A P re q u i re s t h a t u n re a l i ze d i t e m s t h a t a re
n o rm a l l y re p o rt e d o n t h e b a l a n c e s h e e t b e
a d d e d b a c k t o c o m p u t e " C o m p re h e n s i v e I n c o m e,"
The McGraw-Hill Companies,Inc.,1999
Slide
12-42
Irwin/McGraw-Hill
Hang in there! We
are coming down
the home stretch!
Yeah,that is
easy for you
to say!
Slide
12-1
Irwin/McGraw-Hill
Chapter 12
Income and Changes in Retained
Earnings
The McGraw-Hill Companies,Inc.,1999
Slide
12-2
Irwin/McGraw-Hill
Reporting the Results of Operations
I n c o m e
fr o m
c o n ti n u i n g
o p e r a ti o n s,
N o r m a l,r e c u r r i n g
r e v e n u e a n d e x p e n s e
t r a n s a c t i o n s,
1, T h e r e s u l ts o f
d i s c o n ti n u e d
o p e r a ti o n s,
2, T h e i m p a c t o f
e x tr a o r d i n a r y
i te m s,
3, T h e e ff e c ts o f
c h a n g e s i n
a c c o u n ti n g
p r i n c i p l e s,
U nu s ua l,no nr e c ur r i ng
e v e nt s t ha t a f f e c t
ne t i nc om e,
I nf orm a t i on a bo ut ne t i nc om e i s us e d
by i nv e s t or s,c r e di t or s,a nd ot he r
f i na nc i a l s t a t e m e nt us e r s,
The McGraw-Hill Companies,Inc.,1999
Slide
12-3
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
The McGraw-Hill Companies,Inc.,1999
Slide
12-4
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
This tax expense
does not include
effects of unusual,
nonrecurring items.
The McGraw-Hill Companies,Inc.,1999
Slide
12-5
Irwin/McGraw-Hill
R o s s C o r p o r a t i o n
I n c o m e S t a t e m e n t
F o r t h e Y e a r E n d e d D e c e m b e r 3 1,2 0 0 1
N e t S a l e s 8,0 0 0,0 0 0$
C o s t o f g o o d s s o l d 4,5 0 0,0 0 0
G r o s s m a r g i n 3,5 0 0,0 0 0$
O p e r a t i n g e x p e n s e s,
S e l l i n g e x p e n s e s 1,5 0 0,0 0 0$
G e n e r a l & A d m i n, e x p, 9 2 0,0 0 0
L o s s o n s e t t l e m e n t o f l a w s u i t 8 0,0 0 0
I n c o m e t a x e s 3 0 0,0 0 0 2,8 0 0,0 0 0
I n c o m e f r o m C o n t i n u i n g O p e r a t i o n s 7 0 0,0 0 0$
D i s c o n t i n u e d O p e r a t i o n s 2 4 5,0 0 0
E x t r a o r d i n a r y I t e m s ( 7 0,0 0 0 )
C u m u l a t i v e e f f e c t o f a c h a n g e
i n a c c o u n t i n g p r i n c i p l e 1 4 0,0 0 0
N e t i n c o m e 1,0 1 5,0 0 0$
These unusual,
nonrecurring items are
each reported net of
taxes.
The McGraw-Hill Companies,Inc.,1999
Slide
12-6
Irwin/McGraw-Hill
Discontinued Operations
Income/Loss from
operating the segment
prior to disposal.Discontinued
Operations
Income/Loss on disposal
of the segment.
When management enters into a formal plan to sell or
discontinue a segment of the business.
The McGraw-Hill Companies,Inc.,1999
Slide
12-7
Irwin/McGraw-Hill
Discontinued Operations
When management enters into a formal plan to sell or
discontinue a segment of the business.
A segment must be a separate line
of business activity or an operation
that services a distinct category of
customers.
The McGraw-Hill Companies,Inc.,1999
Slide
12-8
Irwin/McGraw-Hill
During 2000,Apex Co,sold an unprofitable
segment of the company,The segment had a
net loss from operations during the period of
$150,000 and its assets sold at a loss of
$100,000,Apex reported income from
continuing operations of $350,000,All items
are taxed at 30%,
How will this appear on the income
statement?
Discontinued Operations
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-9
Irwin/McGraw-Hill
Discontinued Operations Example
Los s on s e gm e nt ope r a t i ons ( 1 5 0,0 0 0 )$
Le s s, Ta x be ne f i t s ( $ 1 5 0,0 0 0? 3 0 % ) 4 5,0 0 0
N e t l os s ( 1 0 5,0 0 0 )$
Los s on di s pos a l of a s s e t s ( 1 0 0,0 0 0 )$
Le s s, Ta x be ne f i t s ( $ 1 0 0,0 0 0? 3 0 % ) 3 0,0 0 0
N e t l os s ( 7 0,0 0 0 )$
The McGraw-Hill Companies,Inc.,1999
Slide
12-10
Irwin/McGraw-Hill
I n c o m e f r o m c o n t i n u i n g o p e r a t i o n s 3 5 0,0 0 0$
D i s c o n t i n u e d o p e r a t i o n s,
L o s s o n o p e r a t io n s ( n e t o f
t a x b e n e f it o f $ 4 5,0 0 0 ) ( 1 0 5,0 0 0 )
L o s s o n d is p o s a l o f a s s e t s ( n e t
o f t a x b e n e f it s o f $ 3 0,0 0 0 ) ( 7 0,0 0 0 )
E a r n i n g s b e f o r e e x t r a o r d i n a r y i t e m 1 7 5,0 0 0$
Income Statement Presentati n:
Discontinued Operations Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-11
Irwin/McGraw-Hill
?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.
Extraordinary Items
The McGraw-Hill Companies,Inc.,1999
Slide
12-12
Irwin/McGraw-Hill
During 2000,Apex Co,experienced a loss of
$75,000 due to an earthquake at one of its
manufacturing plants in Nashville,This was
considered an extraordinary item,The
company reported income before
extraordinary item of $175,000,All gains
and losses are subject to a 30% tax rate.
How would this item appear on the 2000
income statement?
Extraordinary Items
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-13
Irwin/McGraw-Hill
Extraordinary Items
Example
E x t r a o r d i n a r y L o s s ( 7 5,0 0 0 )$
L e s s, T a x B e n e f i t s
( $ 7 5,0 0 0? 3 0 % ) 2 2,5 0 0
N e t L o s s ( 5 2,5 0 0 )$
The McGraw-Hill Companies,Inc.,1999
Slide
12-14
Irwin/McGraw-Hill
E x t r a o r d i n a r y L o s s ( 7 5,0 0 0 )$
L e s s, T a x B e n e f i t s
( $ 7 5,0 0 0? 3 0 % ) 2 2,5 0 0
N e t L o s s ( 5 2,5 0 0 )$
E a r ni ngs be f or e e x t r a or di na r y i t e m 1 7 5,0 0 0$
E x t r a or di na r y Los s,
E a r t hqu a k e l os s
( ne t of t a x be ne f i t of $ 2 2,5 0 0 ) ( 5 2,5 0 0 )
E a r ni ngs be f or e c um ul a t i v e e f f e c t of
a c ha nge i n a c c oun t i ng pr i nc i pl e 1 2 2,5 0 0$
Income Statement Presentation:
Extraordinary Items
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-15
Irwin/McGraw-Hill
T yp e o f A cc o u n t i n g
C h an g e D ef i n i t i o n
C h a n g e i n A c c o u n ti n g
P r i n c i p l e
R e p l a c e s o n e G A A P w i th
a n o th e r
C h a n g e i n A c c o u n ti n g
E s ti m a te
R e v i s i o n o f a n e s ti m a te
b e c a u s e o f n e w
i n fo r m a ti o n o r n e w
e x p e r i e n c e
Accounting Changes
The McGraw-Hill Companies,Inc.,1999
Slide
12-16
Irwin/McGraw-Hill
Change 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.
The McGraw-Hill Companies,Inc.,1999
Slide
12-17
Irwin/McGraw-Hill
Change in Accounting Principle
Example
Also in 2000,Apex Co,decided to change from
the double-declining balance to the straight-line
method for depreciation,The effect of this
change is an increase in net income of $65,000,
Apex reported income before cumulative effect
of an accounting change of $122,500 during the
year,All items of income are subject to a 30%
tax rate.
How would this item appear on the income
statement?
The McGraw-Hill Companies,Inc.,1999
Slide
12-18
Irwin/McGraw-Hill
Change in Accounting Principle
Example
I nc r e a s e i n i nc om e 6 5,0 0 0$
Le s s, Ta x e x pe ns e ( $ 6 5,0 0 0? 3 0 % ) ( 1 9,5 0 0 )
N e t i nc r e a s e i n i nc om e 4 5,5 0 0$
Computation:
The McGraw-Hill Companies,Inc.,1999
Slide
12-19
Irwin/McGraw-Hill
I nc r e a s e i n i nc om e 6 5,0 0 0$
Le s s, Ta x e x pe ns e ( $ 6 5,0 0 0? 3 0 % ) ( 1 9,5 0 0 )
N e t i nc r e a s e i n i nc om e 4 5,5 0 0$
Computation:
E a r ni ng s be f ore c um ul a t i v e e f f e c t of
a c ha ng e i n a c c ou nt i ng pri nc i pl e 1 2 2,5 0 0$
C um ul a t i v e e f f e c t of c ha ng e i n
a c c ou nt i ng pri nc i pl e,
C ha ng e i n a c c ou nt i ng m e t ho d
( ne t of $ 1 9,5 0 0 t a x e x pe ns e ) 4 5,5 0 0
N e t I nc om e 1 6 8,0 0 0$
Income Statement Presentation:
Change in Accounting Principle
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-20
Irwin/McGraw-Hill
Change in Estimates
?Revision of a previous
accounting estimate.
?The new estimate
should be used in the
current and future
periods.
?The prior accounting
results should not be
disturbed.
The McGraw-Hill Companies,Inc.,1999
Slide
12-21
Irwin/McGraw-Hill
Change in Estimates
Example
On January 1,1997,we purchased
equipment costing $30,000,with a useful
life of 10 years and no salvage value,
During 2000,we determine that the
remaining useful is 5 years (8-year total
life),We use straight-line depreciation.
Compute the revised depreciation expense
for 2000.
The McGraw-Hill Companies,Inc.,1999
Slide
12-22
Irwin/McGraw-Hill
A s s e t c o s t 3 0,0 0 0$
A c c u m u l a t e d d e p r e c i a t i o n
1 2 / 3 1 / 9 9 - ( $ 3,0 0 0? 3 y e a r s ) ( 9,0 0 0 )
R e m a i n i n g t o b e d e p r e c i a t e d 2 1,0 0 0$
R e m a i n i n g u s e f u l l i f e? 5 y e a r s
R e v i s e d a n n u a l d e p r e c i a t i o n 4,2 0 0$
Record depreciation expense of $4,200 for
2000 and subsequent years.
Change in Estimates
Example
The McGraw-Hill Companies,Inc.,1999
Slide
12-23
Irwin/McGraw-Hill
Let’s
move on
to a few
final
topics.
The McGraw-Hill Companies,Inc.,1999
Slide
12-24
Irwin/McGraw-Hill
Price-earnings Ratio (P/E)
Often,the Price-Earnings Ratio is used to evaluate
the reasonableness of a company抯 stock price.
P r i c e - E a r n i n g s
R a t i o =
C u r r e n t S t o c k
P r i c e
E a r n i n g s P e r
S h a r e
Let’s examine this
further.
The McGraw-Hill Companies,Inc.,1999
Slide
12-25
Irwin/McGraw-Hill
Earnings Per Share (EPS)
A measure of the company抯 profitability and
earning power for the period.
E a r n i n g s
P e r S h a r e
=
N e t
I n c o m e
W e i g h t e d A v e r a g e
N u m b e r o f S h a r e s
O u t s t a n d i n g
Based on the number of shares
issued and the length of time
that number remained
unchanged.
The McGraw-Hill Companies,Inc.,1999
Slide
12-26
Irwin/McGraw-Hill
Earnings Per Share (EPS) -
Partial Income Statement
Use the information from Apex Co,that
was generated earlier,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,
The McGraw-Hill Companies,Inc.,1999
Slide
12-27
Irwin/McGraw-Hill
Earnings Per Share (EPS) -
Partial Income Statement
I nc om e
S t a t e m e nt
A m ount s E P S
I nc om e f r om c ont i nui ng ope r a t i ons 3 5 0,0 0 0$ 2, 2 4$
Los s f r om di s c ont i nue d ope r a t i ons ( 1 7 5,0 0 0 ) ( 1, 1 2 )
Los s be f or e e x t r a or di na r y i t e m s a nd
c um ul a t i v e e f f e c t of a c c ount i ng c ha nge 1 7 5,0 0 0$ 3, 3 6$
E x t r a or di na r y l os s ( 5 2,5 0 0 ) ( 0, 3 4 )
C um ul a t i v e e f f e c t of a c c ount i ng c ha nge 4 5,5 0 0 0, 2 9
N e t Los s 1 6 8,0 0 0$ 3, 3 2$ *
* Rounding error.
The McGraw-Hill Companies,Inc.,1999
Slide
12-28
Irwin/McGraw-Hill
Earnings Per Share (EPS)
If preferred stock is present,subtract preferred
dividends from net income prior to computing EPS.
N e t I n c o m e - P r e fe r r e d D i v i d e n d s
W e i g h te d A v e r a g e N u m b e r o f
C o m m o n S h a r e s O u ts ta n d i n g
E a r n i n g s
P e r S h a r e
=
EPS is required to be reported
in the income statement.
The McGraw-Hill Companies,Inc.,1999
Slide
12-29
Irwin/McGraw-Hill
Accounting for Cash Dividends
Declared by board
of directors.
Not legally
required.
Creates liability
at declaration.
Requires sufficient
Retained Earnings
and Cash.
The McGraw-Hill Companies,Inc.,1999
Slide
12-30
Irwin/McGraw-Hill
Dividend Dates
Date of Declaration
? Board of directors declares the dividend.
? Record a liability,
D a t e D e s c r i pt i on D e bi t C r e di t
D i v i d e n d s $$$$
D i v i d e n d s P a y a b l e $$$$
The McGraw-Hill Companies,Inc.,1999
Slide
12-31
Irwin/McGraw-Hill
Dividend Dates
Ex-Dividend Date
? The day which serves as the ownership
cut-off point for the receipt of the most
recently declared dividend.
D a t e D e s c r i pt i on D e bi t C r e di t
N O E N T R Y R E Q U I R E D
The McGraw-Hill Companies,Inc.,1999
Slide
12-32
Irwin/McGraw-Hill
Dividend Dates
X
Date of Record
? Stockholders holding shares on this date
will receive the dividend,(No entry)
The McGraw-Hill Companies,Inc.,1999
Slide
12-33
Irwin/McGraw-Hill
Date of Payment
? Record the payment of the dividend to
stockholders.
Dividend Dates
D a t e D e s c r i pt i on D e bi t C r e di t
D i v i d e n d s P a y a b l e $$$$
C a s h $$$$
The McGraw-Hill Companies,Inc.,1999
Slide
12-34
Irwin/McGraw-Hill
Dividend Dates
Question
On June 1,1999 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,
The McGraw-Hill Companies,Inc.,1999
Slide
12-35
Irwin/McGraw-Hill
On June 1,1999 a corporation抯 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
Question
$100?8% = $8 dividend per share
$8?2,500 = $20,000 total dividend
D a t e D e s c r i pt i on D e bi t C r e di t
1 5 - J u l D i v i d e n d s P a y a b l e 2 0,0 0 0
C a s h 2 0,0 0 0
The McGraw-Hill Companies,Inc.,1999
Slide
12-36
Irwin/McGraw-Hill
Accounting for Stock Dividends
No change in total
stockholders?equity.
All stockholders
retain same
percentage
ownership.
No change in par
values.
Distribution of additional shares of stock to
stockholders.
The McGraw-Hill Companies,Inc.,1999
Slide
12-37
Irwin/McGraw-Hill
Summary of Effects of Stock
Dividends and Stock Splits
Sm a l l St o c k
D i v i d e n d
L a r g e St o c k
D i v i d e n d
St o c k Sp l i ts
T o ta l
St o c k h o l d e r s '
Eq u i ty
N o Ef fe c t N o Ef fe c t N o Ef fe c t
C o m m o n St o c k I n c r e a s e s I n c r e a s e s N o Ef fe c t
Pa i d -i n C a p i ta l I n c r e a s e s N o Ef fe c t N o Ef fe c t
R e ta i n e d Ea r n i n g s D e c r e a s e s D e c r e a s e s N o Ef fe c t
N u m b e r o f Sh a r e s
O u ts ta n d i n g
I n c r e a s e s I n c r e a s e s I n c r e a s e s
Pa r V a l u e p e r
Sh a r e
N o Ef fe c t N o Ef fe c t D e c r e a s e s
The McGraw-Hill Companies,Inc.,1999
Slide
12-38
Irwin/McGraw-Hill
Prior Period Adjustments
Adjust retained
earnings retroactively.
The adjustment
should be disclosed
net of any taxes.
The correction of an error identified as
affecting net income in a prior period.
The McGraw-Hill Companies,Inc.,1999
Slide
12-39
Irwin/McGraw-Hill
Comprehensive Income
I s s u a n c e o f n e w
s h a re s o f s t o c k,
N e t I n c o m e o r
N e t L o s s
P a y m e n t o f
D i v i d e n d s
N o rm a l l y,t h e re a re 3 w a y s
t h a t f i n a n c i a l p o s i t i o n c a n c h a n g e,
The McGraw-Hill Companies,Inc.,1999
Slide
12-40
Irwin/McGraw-Hill
Comprehensive Income
I s s u a n c e o f n e w
s h a re s o f s t o c k,
N e t I n c o m e o r
N e t L o s s
P a y m e n t o f
D i v i d e n d s
N o rm a l l y,t h e re a re 3 w a y s
t h a t f i n a n c i a l p o s i t i o n c a n c h a n g e,
GAAP excludes some unrealized items from
income,such as the change in market value of
available-for-sale debt and equity investments.
The McGraw-Hill Companies,Inc.,1999
Slide
12-41
Irwin/McGraw-Hill
Comprehensive Income
T h e a c c u m u l a t e d a m o u n t
o f c h a n g e s a f f e c t i n g
C o m p re h e n s i v e I n c o m e
i s re p o rt e d i n e q u i t y,
A s a s e c o n d
i n c o m e s t a t e m e n t,
C om bi ne d w i t h
n e t i n c o m e o n
t he I nc om e
S t a t e m e n t,
A s a n e l e m e n t
o f s t o c k h o l d e rs '
e q u i t y,
T h e re a re 3 o p t i o n s
f o r re p o rt i n g
C o m p re h e n s i v e I n c o m e
G A A P re q u i re s t h a t u n re a l i ze d i t e m s t h a t a re
n o rm a l l y re p o rt e d o n t h e b a l a n c e s h e e t b e
a d d e d b a c k t o c o m p u t e " C o m p re h e n s i v e I n c o m e,"
The McGraw-Hill Companies,Inc.,1999
Slide
12-42
Irwin/McGraw-Hill
Hang in there! We
are coming down
the home stretch!
Yeah,that is
easy for you
to say!
