Chapter 11 The Income Statement & The Statement of Stockholders’ Equity

Learning Objectives Analyze a complex income statement Account for a corporation’s income tax Analyze a statement of stockholders’ equity Understand managers’ and auditors’ responsibilities for the financial statements

Analyze a complex income statement

Account for a corporation’s income tax

Analyze a statement of stockholders’ equity

Understand managers’ and auditors’ responsibilities for the financial statements

Income from Continuing Operations A measure of the part of the business expected to be ongoing. Used to predict future income.

A measure of the part of the business expected to be ongoing.

Used to predict future income.

Predicting Future Profits Estimated value of Common Stock = Estimated annual income in the future Investment capitalization rate Sell the stock Is less than Hold the stock Equals Buy the stock Current market Value of the Company Exceeds Decision If estimated value of the company:

Other Income Statement Items Discontinued Operations Extraordinary Gains and Losses (Extraordinary Items) Must be both infrequent and Unusual Cumulative Effect of a Change in Accounting Method

Discontinued Operations

Extraordinary Gains and Losses (Extraordinary Items)

Must be both infrequent and

Unusual

Cumulative Effect of a Change in Accounting Method

Earnings Per Share Earnings per share is disclosed separately for: continuing operations discontinued operations Extraordinary items Cumulative effect of change in accounting method Earnings per share = Net Income - Preferred dividends Average number of shares of common outstanding

Earnings per share is disclosed separately for:

continuing operations

discontinued operations

Extraordinary items

Cumulative effect of change in accounting method

Earnings Per Share Effect of preferred stock preferred dividends must be paid before distributions of earnings to common stockholders. Dilution Convertible items could result in diluted eps. Diluted EPS is disclosed on the income statement.

Effect of preferred stock

preferred dividends must be paid before distributions of earnings to common stockholders.

Dilution

Convertible items could result in diluted eps.

Diluted EPS is disclosed on the income statement.

Comprehensive Income Change in total stockholders’ equity from all sources other than from the owners business. Unrealized gains (losses) on available-for-sale investments Foreign-currency translation adjustments

Change in total stockholders’ equity from all sources other than from the owners business.

Unrealized gains (losses) on available-for-sale investments

Foreign-currency translation adjustments

Corporate Income Taxes Must measure Income tax expense Income tax payable Income tax expense = Income before income tax (from the income statement) X Income Tax Rate Income tax payable = Taxable income from the income tax return filed with theIRS X Income Tax Rate

Must measure

Income tax expense

Income tax payable

Corporate Income Taxes Difference between income tax expense and income tax payable is a deferred tax liability or deferred tax asset.

Difference between income tax expense and income tax payable is a deferred tax liability or deferred tax asset.

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.

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.

Statement of Stockholders’ Equity Reports all changes in equity for the period. Issuance of stock Net income Cash dividends Stock dividends Treasury stock transactions Accumulated other comprehensive income

Reports all changes in equity for the period.

Issuance of stock

Net income

Cash dividends

Stock dividends

Treasury stock transactions

Accumulated other comprehensive income

Responsibility for Financial Statements Management is responsible for the financial statements Auditors express opinions about the preparation and presentation of the financial statements Unqualified (statements are reliable) Qualified (statements are reliable except for specified items) Adverse (statements are unreliable) Disclaimer (unable to reach a professional opinion)

Management is responsible for the financial statements

Auditors express opinions about the preparation and presentation of the financial statements

Unqualified (statements are reliable)

Qualified (statements are reliable except for specified items)

Adverse (statements are unreliable)

Disclaimer (unable to reach a professional opinion)

Statement of Stockholders’ Equity