Presentation on theme: "Retained Earnings, Treasury Stock, and the Income Statement"— Presentation transcript:
1 Retained Earnings, Treasury Stock, and the Income Statement Chapter 14
2 Retained Earnings and Dividends Retained Earnings shows the amount of income allowed to accumulate from the beginning of the corporation’s life to the present.Retained Earnings represents a claim on assets, but it is not cash.
3 Retained Earnings and Dividends The balance in the Income Summary account is closed to Retained Earnings at period end.Dividends are distributions to the stockholders.To declare dividends there must be adequate retained earnings.
4 Account for stock dividends. Objective 1Account for stock dividends.
5 Stock Dividends What are stock dividends? They are a proportional distribution of a corporation’s own stock to shareholders.They do not change total stockholders’ equity.A stock dividend is a transfer of retained earnings to contributed capital.
6 Small Stock Dividend Example The dividend is valued at the product of the number of shares distributed times the market price at declaration date.San Diego Company, with 300,000 shares of $2 par value common stock outstanding, declares a 15% stock dividend when the shares are trading at $20.
7 Small Stock Dividend Example How much stock do the shareholders receive?300,000 × 15% = 45,000 shares45,000 at $20 per share = $900,000, and 45,000 at $2 per share = $90,000What is the entry when the dividend is distributed?
8 Small Stock Dividend Example Retained Earnings ,000Common Stock ,000Paid-in Capital inExcess of Par ,00015% common stock dividend distributed
9 Large Stock DividendThis significantly increases the number of shares outstanding and is likely to reduce the per share price.A common practice is to transfer the par value of the dividend shares from Retained Earnings to Common Stock.
10 Large Stock Dividend Example A 50% dividend is declared on a company’s $1 par value common.There are 200,000 shares outstanding.Retained Earnings 100,000Common Stock ,00050% common stock dividend distributed
11 Stock SplitThis is an increase in the number of authorized, issued, and outstanding shares.It is a reduction in the par value.The market value is usually affected proportionately.
12 Stock SplitA 5-for-1 stock split means that the company would have five times as many shares outstanding after the split as it had before.Each share’s par value would be divided by five.
13 Stock Split ExamplePrior to a 5-for-1 split, San Diego Company had 500,000 shares of $10 par common stock authorized and 100,000 issued.After the split, 2,500,000 are authorized.500,000 are issued.What is the par value per share?$10 ÷ 5 = $2
15 Similarities Between Stock Splits and Stock Dividends Both increase the number of sharesof stock owned per stockholder.Neither change the investor’scost of the stock they own.Neither type of income createstaxable income for the investor.
16 Differences Between Stock Splits and Stock Dividends A stock dividend shifts an amount from retained earnings to paid-in capital.The par value per share remains unchanged.A stock split affects no account balance.It changes the par value of the stock.It increases the number of shares of stock authorized, issued, and outstanding.
17 Account for treasury stock. Objective 3Account for treasury stock.
18 Treasury Stock...are shares that a company has issued and later reacquired.Purchasing treasury stock decreases assets and stockholders’ equity.
19 Treasury Stock Example San Diego Company purchased 1,000 shares of its own $10 par value common stock at $20 per share (500,000 shares are authorized, 10,000 are issued.)Treasury Stock 20,000Cash ,000Purchased 1,000 shares of treasury stock
20 Treasury Stock Example Stockholders’ Equity(Before purchase of treasury stock)Common stock, $10 par, 10,000 issued $100,000+ Paid-in capital in excess of par ,000= Total paid-in capital $900,000+ Retained earnings ,000= Total stockholders’ equity $950,000
21 Treasury Stock Example (After purchase of treasury stock)Common stock, $10 par, 10,000 issued,9,000 outstanding $100,000+ Paid-in capital in excess of par ,000+ Retained earnings ,000= Subtotal $950,000– Treasury stock, 1,000 shares ,000= Total stockholders’ equity $930,000
22 Sale of Treasury Stock Example No gain or loss is recognized on the sale of treasury shares.Excess of sales price over cost is credited to Paid-in Capital-Treasury Stock transactions.Assume that 100 shares of treasury stock are sold at $22.
23 Sale of Treasury Stock Example Cash ,200Treasury Stock ,000Paid-In Capital fromTreasury StockSold 100 shares of treasury stockWhat if 100 shares of treasury stock are sold at $18?
24 Sale of Treasury Stock Example Cash ,800Paid-In Capital fromTreasury StockTreasury Stock ,000Sold 100 shares of treasury stock
25 Sale of Treasury Stock Example What if the resale price is less than cost?Debit Paid-in Capital from Treasury Stock Transactions.Debit Retained Earnings if the Paid-in Capital from Treasury Stock Transactions is too small.
26 Retirement of Stock...decreases the outstanding stock of the corporation.Retired shares cannot be reissued.There is no gain or loss on retirement.
27 Report restrictions on Objective 4Report restrictions onretained earnings.
28 Restrictions on Retained Earnings Restrictions are reported on the notes to the financial statements.Appropriations are restrictions on retained earnings that are recorded by formal journal entries.Retained earnings appropriations are rare.There are many acceptable variations in format for presenting stockholders’ equity.
29 Variations in Reporting Stockholders’ Equity The heading Paid-in Capital does not appear.Preferred stock is often reported in a single amount.Additional Paid-in Capital appears as a single amount.Total stockholders’ equity is not specifically labeled.
30 Identify the elements of a complex income statement. Objective 5Identify the elements of acomplex income statement.
31 The Corporate Income Statement (Continuing Operations) Allied CorporationIncome StatementYear Ended December 31, 20x5Net sales revenue $500,000Cost of goods sold ,000Gross profit ,000Operating expenses ,000Operating income ,000
32 The Corporate Income Statement (Continuing Operations) Operating income ,000Other gains (losses):Loss on restructuring operations 10,000Gain on sale of machinery ,000Income from continuing operationsbefore income tax ,000Income tax expense ,000Income from continuing operations 54,000
33 The Corporate Income Statement (Special Items) Discontinued operations income of$35,000, less income tax of $14, ,000Income before extraordinary itemand cumulative effect of change indepreciation method ,000Extraordinary flood loss, $20,000,less income tax savings of $8, –12,000Cumulative effect of change indepreciation method, $10,000,less income tax of $4, ,000Net income $69,000
34 The Corporate Income Statement (Earnings per Share) Earnings per share of common stock(20,000 shares outstanding):Income from continuing operations $2.70Income from discontinued operationsIncome before extraordinary itemand cumulative effect of changein depreciation methodExtraordinary loss –0.60Cumulative effect of change indepreciation methodNet income $3.45
35 Analyzing the Corporate Income Statement Extraordinary items are both unusual and infrequent.They are reported net of their tax effect.The environment must be considered when determining whether an item is unusual.Accounting rules specify extraordinary items.
36 Analyzing the Corporate Income Statement Extraordinary items include expropriations.Also, they include losses due to natural disasters.hurricanefloodfire
37 Analyzing the Corporate Income Statement Changes in accounting methods can result from either of two scenarios:Adoption of a newly required accounting standardChanging accounting methods
38 Earnings Per Share Example On January 1, San Diego Company had 100,000 common shares outstanding.On May 1, the company purchased 15,000 treasury shares.On September 1, they issued 50,000 new shares.Income for the year was $135,000.What are the earnings per share?
39 Earnings Per Share Example No. of Shares Fraction WeightedOutstanding of Year Average100,000 × 4/12 = 33,33385,000 × 4/12 = 28,333135,000 × 4/12 = 45,000Total ,666EPS = $135,000 ÷ 106,666 = $1.27
40 Earnings Per Share and Preferred Stock Preferred dividends must be subtracted from income subtotals (income from continuing operations, income before extraordinary items, and net income) in the computation on EPS.They are not subtracted from income or loss from discontinued operations, or from extraordinary gains or losses.
41 Earnings Per Share and Preferred Stock Corporations with complex capital structures present two sets of EPS amounts.EPS based on outstanding common shares (basic EPS)EPS based on outstanding common shares plus the number of additional common shares that would arise from conversion of the preferred stock
42 Reporting Comprehensive Income FASB Statement 130 requires companies with certain gains and losses to report a comprehensive income figure.Comprehensive income is the company’s change in total stockholders’ equity from all sources other than from the owners of the business.
43 Reporting Comprehensive Income FASB 130 New ComprehensiveIncome ComponentsUnrealized gains or losseson certain investmentsForeign-currencytranslation adjustment
44 Prior Period Adjustments... are corrections to the beginning balance of Retained Earnings for errors of an earlier period.The correcting entry includes a debit or credit to Retained Earnings for the error amount.It also includes a debit or credit to the asset or liability account that was misstated.
45 Statement of Retained Earnings Example De Graff CorporationYear Ended December 31, 20x5Retained earnings, Dec 31, 20x4 (original) $390,000Less: Prior-period adjustments – to correcterror in the 20x4 income tax ,000Retained earnings, Dec. 31, 20x4, adjusted $380,000Net income for 20x ,000Total $494,000Deduct: Dividends declared in 20x ,000Retained earnings, December 31, 20x5 $453,000
46 Objective 6Prepare a statement ofstockholders’ equity.
47 Statement of Stockholders’ Equity Most companies report a statement of stockholders’ equity, which is more comprehensive than a statement of retained earnings.
48 Statement of Stockholders’ Equity... reports changes in all categories of equity during the period.It reports stock transactions, dividends, and the effects of treasury stock transactions.
49 Statement of Stockholders’ Equity Example AdditionalCommon Paid-in RetainedStock Capital EarningsBalance, December 31, 20x4 $ 80,000 $160,000 $130,000Issuance of stock , ,000Net income ,000Cash dividends (21,000)Stock dividends – 8% , , (34,000)Purchase of treasury stockSale of treasury stock ,000Balance, December 31, 20x5 $108,000 $264,000 $144,000
50 Statement of Stockholders’ Equity Example TreasuryStock TotalBalance, December 31, 20x4 $(25,000) $345,000Issuance of stock ,000Net income ,000Cash dividends (21,000)Stock dividends – 8%Purchase of treasury stock (9,000) (9,000)Sale of treasury stock , ,000Balance, December 31, 20x5 $(30,000) $486,000