1. Prepared by: Debbie Musil Kwantlen University College
Chapter Corporations: Dividends, Retained Earnings and Income Reporting
Prepared by:
Debbie Musil
Kwantlen University College

2. Cash Dividends To pay dividends, a corporation must: Declaration date:
Have enough retained earnings and cash
Declare a dividend payable
Declaration date:
Board of directors formally declares dividend
Commits company to a legal obligation
Declaration is recorded:

3. Cash Dividends 2 Record date: Payment date:
Ownership of shares is determined
Shareholders of record on this date will receive dividend
No journal entry required
Payment date:
Dividend is paid to shareholders and recorded:

4. Stock Dividends
Distribution of corporation’s own shares to its shareholders
Does not change assets or shareholders’ equity
Satisfies shareholders' dividend expectations without spending cash
Increasing number of shares will cause market price to decrease and make shares more affordable
Emphasizes that a portion of shareholders’ equity has been permanently retained in the business
Therefore unavailable for cash dividends

5. Entries for Stock Dividends
Declaration date:
Issue (payment) date:

6. Stock Splits Involves the issue of additional shares to shareholders
Similar to a stock dividend
Increases the marketability of shares by lowering market value per share
Effect on share price is generally inversely proportional to size of split
Does not affect shareholders’ equity
Therefore no entries are required

7. Comparison of Dividends and Stock Splits
Cash dividends reduce assets and shareholders’ equity (retained earnings)
Stock dividends increase share capital and decrease retained earnings
Stock dividends have no effect (but do increase number of shares issued)

8. Corporate Income Taxes
Income statement for corporations are the same as proprietorship or a partnership
Major difference is income taxes
Since corporation is a separate legal entity
Affects income statement (income tax expense) and balance sheet (income tax payable)

9. Corporate Income Taxes 2
Interperiod tax allocation: Dividing income tax between amounts payable now and payable later
Intraperiod tax allocation: Associating income taxes in a period with their related items of income

10. Comprehensive Income Statement
Additional statement required in certain circumstances
Includes all increases and decreases in shareholders’ equity except from share and dividend transactions

11. Retained Earnings
The cumulative total of income less losses and less declared dividends since incorporation
Represents part of shareholder’s claim on total assets of a corporation
Not a claim on any specific asset (including cash)
May be subject to restrictions that limit the amount that can be paid out as dividends:
Contractual restrictions such as debt covenants
Voluntary restrictions imposed by the Board of Directors

12. Prior Period Adjustments
A prior period adjustment results from:
the correction of a material error in reporting net income in a prior year, or
the changing of an accounting principle
Accounting treatment:
Use corrected amount or new principle in reporting results for the current year
Disclose cumulative effect of correction/change as an adjustment to retained earnings, net of tax
Correct/restate financial statements for prior periods
Disclose effect of change in financial statements

13. Correction of Prior Period Errors
Correction is made directly to retained earnings
Since effect of error is now located there (all revenues and expenses have been closed to retained earnings)
Any corrections are net of any income tax effect
Example: overstatement of cost of goods sold
Understatement of inventory, net income (now retained earnings), and income tax payable

14. Change in Accounting Principle
Occurs when the principle used in current year is different that that used in prior year
May be voluntary or prescribed (by the CICA)
Usually applied retroactively (prior years restated) unless not practical to do so
Comparative amounts are restated
Retained earnings is adjusted, net of tax
Similar to adjustment for correction of errors

15. Reporting of Prior Period Adjustments
Reported in the statement of retained earnings
Adjustment is added to (subtracted from) opening balance of retained earnings, net of income tax effect
Financial statements of prior years are restated to reflect the change

16. Statement of Retained Earnings
Shows the changes in retained earnings during the year
Transactions that affect retained earnings:

17. Sample Statement of Retained Earnings

18. Earnings Performance: Earnings per Share
Indicates net income earned by each common share
Reported on the income statement
Formula to calculate:
Weighted average number of common shares = shares issued during the year x the fraction of the year they are outstanding
Example: April 1 = 3/12 months if calendar year used
Net income less Preferred Dividends
Weighted Average Number of Common Shares
Earnings per Share ÷ =

19. Earnings per Share: Complex Share Structures
When a company has securities that can be converted into common shares
Example: convertible preferred shares
If converted, the additional common shares will result in a reduced (diluted) EPS figure
Two EPS amounts are calculated:
Basic EPS: calculation on preceding page
Fully diluted EPS: calculated as if all securities were converted into common shares

20. Earnings Performance: Price-Earnings Ratio
Helps investors compare earnings of different companies
Formula to calculate:
A high PE ratio is an indicator that investors believe the company has good earnings potential
Market Price per Share
Earnings per Share
Price-Earnings Ratio ÷ =

21. Payout Ratio
Indicates what percentage of earnings a company is distributing to its shareholders
Can be calculated for both common and preferred shares:
Payout ratios vary with the industry
Income trusts: very high ratios
High payout ratios can indicate that a company is not reinvesting enough in its operations
Cash Dividends
Payout Ratio ÷ =
Net income

22. COPYRIGHT
Copyright © 2009 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by Access Copyright (The Canadian Copyright Licensing Agency) is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his or her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information contained herein.