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Corporate Reporting: Income, Earnings Per Share, and Retained Earnings CHAPTER 11 Electronic Presentations in Microsoft® PowerPoint®

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Presentation on theme: "Corporate Reporting: Income, Earnings Per Share, and Retained Earnings CHAPTER 11 Electronic Presentations in Microsoft® PowerPoint®"— Presentation transcript:

1 Corporate Reporting: Income, Earnings Per Share, and Retained Earnings CHAPTER 11 Electronic Presentations in Microsoft® PowerPoint®

2 1. 1. Explain the form and content of a comprehensive corporate income statement Describe and account for share dividends and share splits Describe and account for retirement of shares Calculate earnings per share and describe its use Explain the items reported in retained earnings Record the purchase and reissue of treasury shares (Appendix 16A). Learning Objectives

3   Income statements are used to evaluate past performance and predict future performance.   Certain activities that are not part of a company’s normal, continuing activities are reported separately.   Separating these other activities makes the income statement more useful to users. Reporting Income Information

4 The income statement is divided into the following sections: 1. Continuing Operations 2. Discontinued Operations 3. Extraordinary Items 4. Earnings Per Share Reporting Income Information

5 Continuing operations Discontinued operations Extraordinary items Earnings per share

6 Continuing operations Shows the revenues, expenses, and income generated by the company’s day-to-day operating activities.

7 Discontinued operations Shows: 1.The income from operating the discontinued segment prior to its disposal, and 2.The gain or loss from selling or closing down a segment.

8 Extraordinary items Shows items that meet the following criteria: 1.They are not expected to occur frequently over several years, 2.They do not typify the normal activities of the entity, and 3.They do not depend primarily on the decisions or determinations by management or owners.

9 Earnings per share Shows the amount of income earned by a company’s outstanding common shares.

10 A corporation’s distribution of its own shares to its shareholders without receiving payment in return. Share Dividends

11  Transfer a portion of equity from retained earnings to contributed capital.  Do not reduce a corporations’ assets or shareholders’ equity. Share Dividends

12 Reasons: 1. Keeps the market price of the stock affordable. 2. Conserves cash for business expansion. 3. Provides evidence of management’s confidence that the company is doing well. Share Dividends

13 Illustration: Share Dividends The directors of X-Quest declare a 10% share dividend on December 31, The company currently has 10,000 shares outstanding and the market price of the shares is $15 per share. The dividend is to be distributed on January 20 to the shareholders of record on January 15. The amount of the share dividend is calculated as follows: Share dividend = (# of common shares outstanding x percentage x market price per share) = 10,000 shares x 10% x $15 per share = $15,000

14 Illustration: Share Dividends On December 31, the date of declaration, the entry would be: Share Dividends 15,000 Common Share Dividends Distributable 15,000 or Retained Earnings 15,000 Common Share Dividends Distributable 15,000

15 Illustration: Share Dividends On December 31, the company’s year-end, one of the closing entries would be: Retained Earnings 15,000 Share Dividends 15,000 This entry would not be necessary if the Retained Earnings account was debited on the date of declaration.

16 Illustration: Share Dividends No entry is required on January 15, the date of record. On January 20, the date of distribution, the entry would be: Common Share Dividends Distributable 15,000 Common Shares 15,000

17 Illustration: Share Dividends $15,000 has been transferred from Retained Earnings to Contributed Capital. X-Quest Ltd. Shareholders Equity Dec. 31, 2011 Before Declaration of Dividend of Dividend Jan. 20, 2012 After Declaration of Dividend Contributed capital: Common shares, unlimited shares authorized Dec. 31, 2011: 10,000 shares issued and outstanding $108,000 Jan. 20, 2011: 11,000 shares issued and outstanding $123,000 Retained earnings 35,00020,000 Total shareholders’ equity $143,000$143,000

18 A stock dividend: A.Reduces a corporation's assets and shareholders' equity. B.Does not reduce a corporation's assets and shareholders' equity. C.Transfers a portion of equity from retained earnings to contributed capital. D.Both B and C. E.Both A and C. Mini-Quiz

19 A stock dividend: A.Reduces a corporation's assets and shareholders' equity. B.Does not reduce a corporation's assets and shareholders' equity. C.Transfers a portion of equity from retained earnings to contributed capital. D.Both B and C. E.Both A and C. Mini-Quiz

20 An act by a corporation to call in its shares and replace each share with more than one new share. Share Splits

21  No journal entry is necessary but note disclosure of the split is required.  The Contributed Capital and Retained Earnings accounts are unchanged by a share split.  The number of shares changes with a share split.  The market value and the book value per share will decrease after a share split. Share Splits

22 Corporations may repurchase shares of its own outstanding share capital. Reasons: 1. To avoid a hostile takeover by an investor, 2. To maintain a strong and stable market for the shares, or 3. To show that management has confidence in the price of the shares. Repurchase of Shares

23 Illustration: Repurchase of Shares Delta Inc. originally issued its shares at an average price of $12. On May 1, the company purchased and retired 1,000 of its shares at the same price for which they were issued. The entry on May 1 would be: Common Shares 12,000 Cash 12,000

24 Illustration: Repurchase of Shares On June 1, the company retires 500 common shares, paying $11, which is less than the $12 average issue price. The entry on June 1 would be: Common Shares 6,000 Cash 5,500 Contributed Capital from Retirement of Common Shares 500

25 Illustration: Repurchase of Shares On July 5, the company retires 2,000 common shares, paying $15, which is more than the $12 average issue price. The entry on July 5 would be: Common Shares24,000 Contributed Capital from Retirement of Common Shares*500 Retained Earnings5,500 Cash30,000 *This brings the account balance to $0.

26 = (Net income ­ Preferred dividends) Weighted-average common shares outstanding EPS is one of the most widely cited items of accounting information. EPS is one of the most widely cited items of accounting information. Earnings Per Share (EPS) Basic earnings per share

27 Basic earnings per share = (Net income - Preferred dividends)* Weighted-average common shares outstanding** * Preferred dividends declared in current year unless preferred shares are cumulative. If the shares are cumulative, then dividends are subtracted regardless of whether they have been declared. **The number of shares outstanding are restated when there are share dividends or stock splits. The number of shares are restated as if the dividend or stock split occurred at the start of the year. Earnings Per Share (EPS)

28  Shows how the Retained Earnings account changes over the accounting period.  May be combined with the income statement. Statement of Retained Earnings

29 Restrictions that cause a portion of retained earnings not to be available for dividends and share repurchases. Types:  Statutory  Contractual  Voluntary Restricted Retained Earnings

30 Types:  Change in Accounting Policy or Principle  Correction of Error(s) in Prior Financial Statements  Changes in Estimates Accounting Changes

31 Accounting Change Accounting Treatment Change in Accounting Policy or Principle Retroactive restatement of financial statements, Retroactive restatement of financial statements, Disclosure, Disclosure, New policy or corrected amount is reported in current years’ operating results, and New policy or corrected amount is reported in current years’ operating results, and Adjust opening balance of Retained Earnings. Adjust opening balance of Retained Earnings. Corrections of Error(s) in Prior Financial Statements Change in Estimate Accounted for in period of change and future. Accounting Changes

32 Explain the form and content of a comprehensive income statement. A comprehensive income statement has four potential sections: (1) continuing operations, (2) discontinued segments, (3) extraordinary items, and (4) earnings per share. Many corporations only report items from continuing operations and earnings per share. The other items are only included in the years in which they occur. Review

33 Describe stock dividends and stock splits. Both stock splits and stock dividends divide a company's outstanding shares into smaller pieces. The total value of the company is unchanged, but the price of each new share is smaller. Stock dividends and stock splits do not transfer any of the corporation's assets to shareholders. Stock splits and stock dividends distribute additional shares to shareholders according to their percentage of ownership. Review

34 Are shares that were reacquired and are still held by the issuing corporation. Treasury shares:  Have been issued but are not outstanding.  Do not receive dividends.  Do not have voting rights.  Reduce the corporation’s assets and shareholders’ equity. Treasury Shares Appendix 16A

35 Illustration: Treasury Shares On May 2, Cyber purchased 1,000 of its own common shares at $11.50 per share. The entry on May 2 would be: Treasury Shares, Common 11,500 Cash 11,500

36 Illustration: Treasury Shares On May 20, Cyber reissued 100 of the treasury shares at $11.50 per share, their cost. The entry on May 20 would be: Cash 1,150 Treasury Shares, Common 1,150 On June 3, Cyber reissued 400 of the treasury shares at $12 per share, which is above their cost. The entry on June 3 would be: Cash 4,800 Treasury Shares, Common 4,600* Contributed Capital, Treasury Shares 200 *(400 shares x $11.50 per share)

37 Illustration: Treasury Shares On July 10, Cyber reissued 300 of the treasury shares at $11.00 per share, which is below their cost. The entry on July 10 would be: Cash 3,300 Contributed Capital, Treasury Shares 150 Treasury Shares, Common 3,450* *(300 shares x $11.50 per share)

38 Illustration: Treasury Shares On July 15, Cyber reissued 100 of the treasury shares at $10.00 per share, which is below their cost. The entry on July 15 would be: Cash 1,000 Contributed Capital, Treasury Shares 50 Retained Earnings 100 Treasury Shares, Common 1,150* *(100 shares x $11.50 per share) The difference between the purchase price and the reissue price is applied to the Contributed Capital, Treasury Shares account and then to Retained Earnings.

39 End of Chapter


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