Presentation on theme: "The Income Statement & The Statement of Stockholders’ Equity"— Presentation transcript:
1 The Income Statement & The Statement of Stockholders’ Equity Chapter 11The Income Statement & The Statement of Stockholders’ Equity
2 Learning Objectives Analyze a complex income statement Account for a corporation’s income taxAnalyze a statement of stockholders’ equityUnderstand managers’ and auditors’ responsibilities for the financial statements
3 Income StatementPeriodically Prepared to report Financial Consequences of Activities UndertakenBy Accounting EntityWithin a Certain Period of TimeProfitMore resources available at end-of-period then beginning-of-periodLossConsumed more resources by the end-of-period then it generated
4 Income Statement Summary of Revenues and Expenses For a Specific Period of TimeGrouped by ClassSalesReturns and AllowancesDiscountsCost of Goods SoldGross Margin/ProfitOperating ExpensesSelling ExpensesSalariesAdvertisingTravelTelephoneSuppliesDepreciationAdministrativeSalariesTelephoneLegal & ProfessionalSuppliesDepreciation – Bldg & EquipMisc.Net Income from OperationsOtherInterest ExpenseInterest IncomeDiscontinued OperationsExtraordinary EventsCumulative Effect of ChangeNet IncomeEarnings Per Share
6 Income Statement - Continuing Operations Allied Electronics CorporationIncome StatementYear Ended December 31, 20x5Sales revenue $500,000Cost of goods sold –240,000Gross margin $260,000Operating expenses ,000Operating income $ 79,000
7 Income Statement - Continuing Operations Operating income $79,000Other gains (losses):Loss on restructuring operations ( 8,000)Gain on sale of machinery ,000Income from continuing operationsbefore income tax $90,000Income tax expense ,000Income from continuing operations $54,000
8 Income Statement - Special Items Discontinued operations: $35,000,less income tax of $14, ,000Income before extraordinary itemsand cumulative effect of changein depreciation method $75,000Extraordinary flood loss, $20,000,less income tax savings of $8,000 (12,000)Cumulative effect of change indepreciation method, $10,000,less income tax of $4, ,000Net income $69,000
9 Income from Continuing Operations A measure of the part of the business expected to be ongoing.Used to predict future income.
10 Predicting Future Profits Estimated annualincome in the futureEstimated value ofCommon Stock=Investmentcapitalization rateIf estimated value of the company:DecisionExceedsCurrent marketValue of theCompanyBuy the stockEqualsHold the stockIs less thanSell the stock
12 Continuing Operations The company restructured operations at a loss of $8,000.Report as “Other” item – part of continuing operations, but falls outside of main business endeavor
13 Other Income Statement Items Discontinued OperationsExtraordinary Gains and Losses (Extraordinary Items)Must be both infrequentseldom happening or occurringand Unusualnot ordinarily encounteredCumulative Effect of a Change in Accounting Method
14 Discontinued Operations Segment – identifiable division of a companySold orClosed
15 Extraordinary Items Unusual for the company and infrequent Losses due to natural disastersExpropriationsthe action of the state in taking or modifying the property rights of an individual in the exercise of its sovereigntyAn ExceptionMaterial gains/losses from extinguishment of debt (to be reported as extraordinary item)
16 Cumulative Effect of a Change in Accounting Principle From double-declining-balance (DBB) to straight-line depreciationFrom first-in, first-out (FIFO) to weighted-average cost for inventoryReport in a special section of the income statement after extraordinary items
17 Average number of shares of common outstanding Earnings Per ShareNet Income-Preferred dividendsEarnings per share=Average number of shares of common outstandingEarnings per share is disclosed separately for:continuing operationsdiscontinued operations (do not subtract pfd)Extraordinary items (don not subtract pfd)Cumulative effect of change in accounting method (do not subtract pfd)
18 Income Statement - Earnings per Share Earnings per share of common stock(20,000 shares outstanding):Income from continuous operations(54000)/ $2.70Income from discontinued operations(21000/20000)Income before extraordinary itemand cumulative effect of changein depreciation method(75000/20000) $3.75Extraordinary loss(12000/20000) (0.60)Cumulative effect of change indepreciation method(6000/20000)Net income(69000/20000) $3.45
19 Earnings Per Share Effect of preferred stock Dilution preferred dividends must be paid before distributions of earnings to common stockholders.DilutionConvertible items could result in diluted eps.Diluted EPS is disclosed on the income statement.
20 Comprehensive IncomeChange in total stockholders’ equity from all sources other than from the owners of the business.Unrealized gains (losses) on available-for-sale investmentsForeign-currency translation adjustments
21 Corporate Income Taxes Must measureIncome tax expenseIncome tax payableIncometaxexpense=Income before income tax (from theincome statement)XTax RateIncometaxpayable=Taxable income from the income tax returnfiled with the IRSXTax Rate
22 Corporate Income Taxes Difference between income tax expense and income tax payable is a deferred tax liability or deferred tax asset.
23 Accounting for Corporate Income Taxes Suppose for 20x5, Nike, Inc., has pretax accounting income of $900 million on the income statement.Taxable income is $800 million on the company’s income tax return.The tax rate is 40%.
25 Accounting for Corporate Income Taxes Income statementIncome before income tax $900Income tax expenseNet income $540Balance sheetCurrent Liabilities:Income tax payable $320Long-term liabilities:Deferred tax liability *Total $360*Assumes beginning tax liability was zero.
26 Retained Earnings Prior period adjustments corrections of errors that occurred in prior periods.Since the temporary accounts have been closed to retained earnings, errors from prior periods must be made to retained earnings.
28 Restrictions on Retained Earnings Dividends and purchases of treasury stock require payments by the corporation to its stockholdersCreditors may restrict a corporation’s dividend payments and treasury stock purchasesCompanies report any retained earnings restrictions in notes to the financial statements
29 Statement of Stockholders’ Equity Reports all changes in equity for the period.Issuance of stockNet incomeCash dividendsStock dividendsTreasury stock transactionsAccumulated other comprehensive income
31 Responsibility for the Financial Statements Managementissues a statement of responsibility with financial statementsdeclares responsibility for financial statements and states that they conform to GAAP
32 Auditor Report Typically contains three paragraphs: Identifies the audited financial statementsDescribes how the audit was performedStates the auditor’s opinion -financial statements conform to GAAP and people can rely on them for decision making
33 Auditor Report Unqualified (Clean) Qualified Adverse Disclaimer the financial statements presented are free of material misstatements and are in accordance with GAAPQualifiedthe financial statements are fairly presented with a certain exception which is otherwise misstatedAdversethe information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operationsDisclaimerthe auditor could not form, and consequently refuses to present, an opinion on the financial statements