financial accounting chapter 12

Fundamentals of Accounting

Ch. 12. Income and

Changes in Retained Earnings

Group 5Arya Gede

Danny D. KosasihDiah Natalin Saragih

Erry SunarliWidyarini Utami

Rogaya

Chapter 12 – Income and Changes in Retained Earnings

Outline

• Result of Operation

• Financial Analysis

• Others factor affecting Retained Earnings

RESULT OF OPERATION

•Continued Operation•Discontinued operation•Extraordinary items•Changes in accounting operations


Reporting The Results Of Operation

REVENUES

Measures of the value of products & services that have been sold to customers

Represents the increases in company’s assets

EXPENSES

Measures of the cost of producing & providing the products & services that are sold to customers

Represents the decreases in company’s assets

NORMAL

UNUSUAL

INCOME STATEMENT

INVESTORS & CREDITORS

• Discontinued operation

• Extraordinary items• Changes in

accounting operations


Reporting Irregular Items: An illustration


Reporting Irregular Items: An illustration – Cont’d

FINANCIAL ANALYSIS

•Earning Per Share•Price Earning Ratio•Basic & Diluted Earning Per Share


Considered if we invest company’s stock at certain price, we need to know the earnings per share and the annual dividend per share to decide whether the price is reasonable. Stock market prices are quoted on a per share basis

Earning Per Share (EPS)

Formula to compute EPS:

EPS = Net incomeaverage number of common share outstanding

or

EPS*= Net income number of shares outstanding

(*if only common stock and no. of outstanding share has not changed during the year)


Weighted Average number of share outstanding must be counted if any outstanding change during the year.

80.000 shares X 9/12 of a year 60.000140.000 shares X 3/12 of a year 35.000Weighted avrg no of common shares outstanding = 95.000

Preferred Dividends in computing EPS Net Income $ 685.000Dividends on preferred stock (12.000 shares X $6) 72.000Earning applicable to common stock 613.000Weighted average no of common shares outstanding : 200.000EPS of common stock ($613.000: 200.000 shares) $ 3.07

Earning Per Share (EPS)


Relationship between EPS & Stock Price is expressed by the price-earning ratio (P/E ratio). P/E ratio based on the earnings over the past year but can reflects investors expectations of the company’s future prospects.

Price Earning Ratio (P/E ratio)

Formula to compute P/E ratio:

= Current stock priceearning per share for the year (last four quarters)


Basic and Diluted Earning per Share

• Basic earnings per share

– Based on weighted-average number of common shares actually outstanding

• Diluted earning per share

– Incorporates the impact that conversion of preferred stock would have on basic earnings per share.

• Purpose :

– To alert common stockholders to what could have happened by conversions of preferred stock into shares of common.

OTHER TRANSACTIONS AFFECTING RETAINED

EARNINGS

•Dividends•Prior Period Adjustment•Comprehensive Income


Type of Dividends

• Cash dividends

• Liquidating dividends

• Stock dividends


Type of Dividends - Cash Dividends

• Return on stock investment :

– The increase in value of the stock

– Cash dividends

• 3 requirements for the payment of cash dividends :

– Retained earnings

– An adequate cash position

– Dividend action by the board of directors

Dividends $ 125.000Cash $ 125.000


Type of Dividends - Dividend Dates

• 4 dates that involved in dividends distribution

1. Date of Declaration

2. Ex-dividend Date

3. Date of Record

4. Date of Payment

• Entries are made on : declaration date and on payment date.


Type of Dividends - Stock Dividends

• The dividends is payable in additional shares of stock, not in cash

• Cash vs Stock dividens :

Cash Dividends Stock Dividends•Reduce assets & equity

•Distribution of cash

•No assets are distributed

•% of ownership still the same

Retained Earnings $ 250,000Stock Dividend to be distributed $ 50,000Add Paid In Cap: Stock Dividend $250,000

Stock Dividend to be distributed $ 50,000Common Stock $ 50,000


Type of Dividends - Stock Dividends (cont’d)

• Market value of the stock should fall in proportion to the number of new shares issued.

• Stock splits vs Stock dividends

Stock splits Stock dividends• To reduce the market price of

the stock• Number of outstanding shares

is larger• Reduce the par value of the

stock• No change in the actual of

stockholder’s equity amount

• To substitute for cash dividends

• The increases are small• No change in the par value of

the stock


Type of Dividends - Liquidating Dividends

• Occurs when a corporation pays a dividend that exceed the balance in the Retained Earnings account

• Usually are paid only when a corporation is going out of existence or is making a permanent reduction in the size of its operations.


Salt Lake CorporationStatement of Retained EarningsFor the Year Ended December 31, 2005 $

Retained Earnings, Dec 31, 2004As originally reported 750,000 Less: Prior period adjustment for error in recording 2004depreciation expense (net of $ 15,000 income taxes) (35,000) As restated 715,000

Net Income for 2005 280,000 Subtotal 995,000

Less Dividends:Cash dividends on preferred stocl ($5 per share) (15,000) Cash dividends on common stock ($2 per share) (59,600) 10% stock dividend (140,000) (214,600)

Retained Earnings, Dec 31, 2005 780,400

Prior Period Adjustment

• Error discovered in Net Income in prior year (I.e material error to record depreciation on asset in 2004) – should be corrected


Comprehensive Income

• Changes in financial position : recognized but not realized, I.e changes in market value of available-for-sale debt and equity investments

– Does not enter into determination of Net Income

– If value has gone up - adds to the amount of stockholder’s equity (S/E). If it has gone down – subtract the amount of S/E

• Comprehensive income identifies the total of net income plis or minus the elements of other comprehensive income

– As a second income statement

– As a single income statement

– As an element in the changes in stockholder’s equity

• This changes stated in element in S/E section of the Balance Sheet


Stockholder’s Equity Section in Balance Sheet

Stockholder's Equity

Capital Stock5% convertible preferred, $100 par value 3,000 shares authorized and issued

300,000 Common stock, $10 par value, 100,000 shares authorized, issued 30,8000 (of which 1,000 are held in treasury) 308,000

608,000 Additional paid-in capital

From issuance of common stock 580,000 From stock dividends 112,000 692,000 Total paid-in capital 1,300,000 Retained earnings 780,400 Subtotal 2,080,400 Less: Treasury stock (1,000 shares at $47 per share) (47,000) Total stockholder's equity 2,033,400

financial accounting chapter 12

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