Bài giảng Financial & Managerial Accounting - Chapter 12: Income and changes in retained earnings

INCOME AND CHANGES IN RETAINED EARNINGSChapter12Information about net income can be divided into two major categoriesIncome from continuing operations.1. The results of discontinued operations2. The impact of extraordinary items.3. The effects of changes in accounting principles.Normal, recurring revenue and expense transactions.Unusual, nonrecurring events that affect net income.Reporting the Results of OperationsThis tax expense does not include effects of unusual, nonrecurring items.These unusual, nonrecurring items are each reported net of taxes.Discontinued OperationsIncome/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.Discontinued OperationsA segment must be a separate line of business activity or an operation that services a distinct category of customers.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 OperationsDuring 2003, 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 - ExampleDiscontinued Operations - ExampleIncome Statement Presentation:Discontinued Operations - ExampleExtraordinary ItemsMaterial 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.During 2003, 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 2003 income statement?Extraordinary Items - ExampleIncome Statement Presentation:Extraordinary Items - ExampleAccounting ChangesChange in Accounting PrincipleOccurs 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.Also in 2003, 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?Change in Accounting Principle ExampleIncome Statement Presentation:Computation:Change in Accounting Principle ExampleChange in EstimatesRevision 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.On January 1, 2000, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2003, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation.Compute the revised depreciation expense for 2003.Change in Estimates - ExampleRecord depreciation expense of $4,200 for2003 and subsequent years.Change in Estimates - ExampleLet’s move on to a few final topics.Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price.Let’s examine this further.Price-earnings Ratio (P/E)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.Earnings Per Share (EPS)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 * Rounded.Earnings Per Share (EPS) -Partial Income Statement 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)Declared by board of directors.Not legally required.Creates liability at declaration.Requires sufficient Retained Earnings and Cash.Accounting for Cash DividendsDate of DeclarationBoard of directors declares the dividend.Record a liability. Dividend DatesEx-Dividend DateThe day which serves as the ownership cut-off point for the receipt of the most recently declared dividend.NO ENTRYDividend DatesXDate of RecordStockholders holding shares on this date will receive the dividend. (No entry)Dividend DatesDate of PaymentRecord the payment of the dividend to stockholders.Dividend DatesOn June 1, 2003, 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. $100 × 8% = $8 dividend per share$8 × 2,500 = $20,000 total dividendDividend Dates - QuestionAll stockholders retain same percentage ownership.No change in total stockholders’ equity.No change in par values.Distribution of additional shares of stock to stockholders.Accounting for Stock DividendsSummary of Effects of Stock Dividends and Stock SplitsAdjust 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.Prior Period AdjustmentsNormally, there are 3 ways that financial position can change.Issuance of new shares of stock.Net Income or Net LossPayment of DividendsGAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments.Comprehensive IncomeGAAP requires that unrealized items that are normally reported on the balance sheet be added back to compute “Comprehensive Income.”As a second Income statement.Combined with Net Income on the Income Statement.As an element of Stockholders’ Equity.The accumulated amount of changes affecting Comprehensive Income is reported in equity.There are 3 options for reporting Comprehensive Income.Comprehensive IncomeHang in there! We’re coming down the home stretch!Yeah, that’s easy for you to say!End of Chapter 12