the income statement, the statement of comprehensive income, and the statement of stockholders’...

Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall.

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The Income Statement, the Statement of Comprehensive Income, & the Statement of Stockholders’ EquityChapter 11


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Evaluate quality of earnings


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Earnings Quality


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Revenue Recognition

•Revenue is recognized when earned


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Cost of Goods Sold and Gross Profit


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Operating and Other Expenses

•Largest operating expenses include salaries, wages, utilities, and supplies

•The lower the cost relative to sales, the more efficiently management is operating the business

•Cutting costs can either help or hurt the bottom line


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Account for foreign-currency gains and losses


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International Transactions

JOURNAL

Date Accounts Debit Credit

7-28 Accounts Receivable (1 million pesos x $0.086)

86,000

Sales 86,000

10-18 Cash (1 million pesos x $0.083) 83,000

Foreign currency transaction loss 3,000

Accounts Receivable 86,000


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International Transactions

JOURNAL


9-15 Inventory (20,000 Swiss francs x $1.15)

23,000

Accounts payable 23,000

10-18 Accounts payable 23,000

Cash (20,000 Swiss francs x $1.10)

22,000

Foreign-currency transaction gain

1,000


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Reporting Foreign-Currency Gains & Losses•Gains and losses netted

▫Shown as Other Revenue or Expense

Income Statement (Partial)

Other Expenses and Losses:

Foreign-Currency Transaction Loss, net

$2,000

$3,000 loss less $1,000 gain


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Account for other items on the income statement


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Interest expense Interest income

• Cost of borrowing money • Return earned on invested money

Interest Expense and Interest Income


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Corporate Income Taxes

Income tax

expense

Income before taxes

Income tax rate

From the income

statement

From the income

statement

Income tax

payable

Taxable income

From the tax return

From the tax return

Income tax rate

Income Statement account

Income Statement account

Balance sheet account

Balance sheet account


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Exercise 11-19A

JOURNAL


12-31 Income Tax Expense ($500,000 x 40%) 200,000

Deferred Tax Liability 24,000

Income Tax Payable ($440,000 x 40%)

176,000

Income taxes paid


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Exercise 11-19A

Deferred tax liability

32,000

24,000

56,000


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Value of Corporate Stock

Estimated value of common

stock

Estimated future annual income

Investment capitalization rate

Current market value of company

Number of common shares

outstanding

Current market

price per share


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Investment Decision Rule

If the estimated value of the company

Decision

Exceeds

Current market

value of the company

Buy the stock because the price may go up

Equals

Hold the stock because the price will hold steady

Is less than

Sell the stock because the price may go down


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Discontinued Operations

•Sale or closure of a business segment•Gain or loss reported net of income tax•Typically not considered by analysts in

making predictions


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Change in estimates Change in principles

• Examples:▫ Estimated life of plant

asset ▫ Percent uncollectible of

receivables• Report new amounts for

current and future periods

• Example:▫ Change in inventory

method (FIFO to LIFO)• Report retrospectively

▫ Prior period amounts are restated

Accounting Changes


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Compute earnings per share


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Earnings per Share (EPS)

Net income minus Preferred DividendsNet income minus Preferred Dividends

Average # of Common Shares Outstanding


Key measure of business

success


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Exercise 11-20A

Preferred stock $20 par, 2%, 11,000 shares issued

$220,000

Common stock, $2.50 par, 1,100,000 shares issued

2,750,000

Treasury stock, common, 120,000 shares at cost

480,000Preferred Dividend = $220,000 x 2%

Preferred Dividend = $220,000 x 2% $4,400$4,400

Common shares outstanding = shares issued less treasury

shares

Common shares outstanding = shares issued less treasury

shares

1,100,000 – 120,000 = 980,000

1,100,000 – 120,000 = 980,000


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Exercise 11-20A

Net Income minus Preferred DividendsNet Income minus Preferred Dividends



Earnings per share

980,000

$6,200,000 – $4,400 $6.32


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Correcting Retained Earnings

•Prior period adjustments▫Corrections to Retained Earnings for errors

of an earlier period Revenue or expense recorded incorrectly in

an earlier period▫Correction of error adjusts beginning

balance of retained earnings


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Analyze the statement of comprehensive income and the statement of stockholders’ equity


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Comprehensive Income

•Change in total stockholders’ equity from all non-owner sources

•Net income plus:▫Unrealized gains (losses) on available-for-

sale investments▫Foreign-currency translation adjustments

•Reported:▫Separate statement OR▫Combined with net income in unified

statement of comprehensive income


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Statement of Stockholders’ Equity•Column for each element of equity

•Row for each transaction that affected equity

Common stock

Additional paid-in capital

Retained

earnings

Accumulated other comprehensive

incomeTreasury stock

Beginning balance

+ Net earnings

+ or - Accumulated other comprehensive income

+ Issuance of stock

- Repurchase of stock

- Dividends


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Differentiate management’s and auditors’ responsibilities in financial reporting


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Management’s Responsibility

•Issues report on and declares responsibility for internal control over financial reporting

•States it has conducted an assessment of internal controls based on developed frameworks▫Internal controls determined to be effective▫Internal controls audited by outside

auditors


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Auditor’s Report

•CPAs examine financial statements of publicly-traded companies

•Auditors determine if statements comply with GAAP▫Decide if internal controls meet standards

•Combined report issued on the financial statements and system of internal controls

•Audit adds credibility to financial statements and internal control system


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the income statement, the statement of comprehensive income, and the statement of stockholders’...

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