Hhtfa8e ch11 stud devry Accounting 212 FINANCIAL ACCOUNTING

The Income Statement &
Statement of Stockholders’
Equity
Chapter 11


Analyze a corporate income statement


Earnings Quality


Revenue Recognition
• Revenue is recognized when earned


Cost of Goods Sold and Gross Profit


Operating and Other Expenses
• Largest operating expenses include salaries,
wages, utilities and supplies
• Interest expense represents charges for
borrowed money
• Interest revenue represents return earned on
invested money
• Income tax expense


Operating Earnings


Value of Corporate Stock
Estimated Estimated future annual income
value of
common
stock Investment capitalization rate

Number of Current
Current
common market
market value
shares price per
of company
outstanding share


Investment Decision Rule
If the estimated value Decision
of the company
Buy the stock because the
Exceeds price may go up
Current
market value Hold the stock because
Equals of the the price will hold steady
company Sell the stock because the
Is less than price may go down


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


Accounting Changes
Change in estimates Change in principles
• Examples: • Example:
▫ Estimated life of plant ▫ Change in inventory
asset method (FIFO to LIFO)
▫ Percent uncollectible of
receivables
• Report new amounts for • Report retrospectively
current and future ▫ Prior period amounts
periods are restated

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13

Earnings per Share (EPS)

Net income minus Preferred Dividends

Average # of Common Shares Outstanding

Key measure of
business
success


Exercise 11-16A
Preferred stock $60 par, 3%, 12,000 shares issued
Common stock, $0.75 par, 1,100,000 shares issued
Treasury stock, common, 90,000 shares at cost

Preferred Dividend = $720,000 x 3% ?

Common shares outstanding = ?
shares issued less treasury shares


Exercise 11-16A
Net Income minus Preferred Dividends
Earnings
per share
Average # of Common Shares Outstanding

?
?
?


Account for a corporation’s income tax


Corporate Income Taxes
Income tax Income Income tax
expense before taxes rate
Income Statement From the Income
account Statement

Income tax Taxable Income tax
payable income rate
Balance sheet From the tax
account return


Exercise 11-18A

Quinn Advertising Inc.
Income Statement (partial)
For year ending December 31, 2010
Income before income tax
Income tax expense (375,000 x 30%)
Net Income


Exercise 11-18A
Quinn Advertising, Inc.
Balance Sheet (partial)
December 31, 2010
Current liabilities:
Income tax payable (300,000 x 30%)
Long-term liabilities:
Deferred tax liability (112,500 – 90,000)


Correcting Retained Earnings
• Prior period adjustments
▫ Revenue or expense recorded incorrectly in an
earlier period
▫ Correction of error adjusts beginning balance of
retained earnings


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


Analyze a statement of stockholders’ equity


Statement of Stockholders’ Equity
• Column for each element of equity
Accumulated other
Common Additional Retained comprehensive Treasury
stock paid-in capital earnings income stock

• Row for each transaction that affected equity
Beginning balance
+ Net earnings
+ or – Accumulated other comprehensive income
+ Issuance of stock
- Repurchase of stock
- Dividends

Understand managers’ and auditors’
responsibilities for the financial statements


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


Auditor’s Report
• CPAs examine financial statements of publicly-
traded companies
• Auditors determine if statements comply with
GAAP
• Combined report issued on the financial
statements and system of internal controls
• Audit adds credibility to financial statements
and internal control system


Hhtfa8e ch11 stud devry Accounting 212 FINANCIAL ACCOUNTING

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