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© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-1
INCOME AND CHANGES
IN RETAINED EARNINGS
Chapter
12
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-2
Information about net income can be divided into
two ma...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-3
This tax expense
does not include
effects of unusual,
n...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-4
Discontinued
Operations
Income/Loss from
operating the ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-5
A segment must be a separate line
of business activity ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-6
During 2003, Apex Co. sold an unprofitable
segment of t...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-7
Discontinued Operations - ExampleDiscontinued Operation...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-8
Income Statement Presentation:
Discontinued Operations ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-9
Extraordinary ItemsExtraordinary Items
Material in amo...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-10
During 2003, Apex Co. experienced a loss of
$75,000 du...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-11
Income Statement Presentation:
Extraordinary Items - E...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-12
Accounting ChangesAccounting Changes
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-13
Change in Accounting PrincipleChange in Accounting Pri...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-14
Also in 2003, Apex Co. decided to change from
the doub...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-15
Income Statement Presentation:
Computation:
Change in ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-16
Change in EstimatesChange in Estimates
Revision of a ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-17
On January 1, 2000, we purchased
equipment costing $30...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-18
Record depreciation expense of $4,200 for
2003 and sub...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-19
Let’s move
on to a few
final
topics.
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-20
Often, the Price-Earnings Ratio is used to evaluate
th...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-21
A measure of the company’s profitability and
earning p...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-22
Remember that Apex Co. income from
continuing operatio...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-23
* Rounded.
Earnings Per Share (EPS) -
Partial Income S...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-24
If preferred stock is present, subtract preferred
divi...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-25
Declared by board
of directors.
Declared by board
of d...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-26
Date of Declaration
 Board of directors declares the ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-27
Ex-Dividend Date
 The day which serves as the ownersh...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-28
X
Date of Record
Stockholders holding shares on this d...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-29
Date of Payment
Record the payment of the dividend to
...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-30
On June 1, 2003, a corporation’s board of
directors de...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-31
All stockholders
retain same
percentage
ownership.
All...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-32
Small Stock
Dividend
Large Stock
Dividend
Stock Splits...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-33
Adjust retained
earnings retroactively.
Adjust retaine...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-34
Normally, there are 3 ways that financial
position can...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-35
GAAP requires that unrealized items that are normally ...
© The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin
Slide
2-36
Hang in there!
We’re coming down
the home stretch!
Yea...
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    1. 1. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-1 INCOME AND CHANGES IN RETAINED EARNINGS Chapter 12
    2. 2. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-2 Information about net income can be divided into two major categories Information about net income can be divided into two major categories Income from continuing operations. Income from continuing operations. 1. The results of discontinued operations 1. The results of discontinued operations 2. The impact of extraordinary items. 2. The impact of extraordinary items. 3. The effects of changes in accounting principles. 3. The effects of changes in accounting principles. Normal, recurring revenue and expense transactions. Normal, recurring revenue and expense transactions. Unusual, nonrecurring events that affect net income. Unusual, nonrecurring events that affect net income. Reporting the Results of OperationsReporting the Results of Operations
    3. 3. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-3 This tax expense does not include effects of unusual, nonrecurring items. This tax expense does not include effects of unusual, nonrecurring items. These unusual, nonrecurring items are each reported net of taxes. These unusual, nonrecurring items are each reported net of taxes.
    4. 4. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-4 Discontinued Operations Income/Loss from operating the segment prior to disposal. Income/Loss on disposal of the segment. When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. Discontinued OperationsDiscontinued Operations
    5. 5. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-5 A segment must be a separate line of business activity or an operation that services a distinct category of customers. A segment must be a separate line of business activity or an operation that services a distinct category of customers. When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the income statement. Discontinued OperationsDiscontinued Operations
    6. 6. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-6 During 2003, Apex Co. sold an unprofitable segment of the company. The segment had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Apex reported income from continuing operations of $350,000. All items are taxed at 30%. How will this appear on the income statement? During 2003, Apex Co. sold an unprofitable segment of the company. The segment had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Apex reported income from continuing operations of $350,000. All items are taxed at 30%. How will this appear on the income statement? Discontinued Operations - ExampleDiscontinued Operations - Example
    7. 7. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-7 Discontinued Operations - ExampleDiscontinued Operations - Example
    8. 8. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-8 Income Statement Presentation: Discontinued Operations - ExampleDiscontinued Operations - Example
    9. 9. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-9 Extraordinary ItemsExtraordinary Items Material in amount. Gains or losses that are both unusual in nature and not expected to recur in the foreseeable future. Reported net of related taxes. Material in amount. Gains or losses that are both unusual in nature and not expected to recur in the foreseeable future. Reported net of related taxes.
    10. 10. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-10 During 2003, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $175,000. All gains and losses are subject to a 30% tax rate. How would this item appear on the 2003 income statement? During 2003, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $175,000. All gains and losses are subject to a 30% tax rate. How would this item appear on the 2003 income statement? Extraordinary Items - ExampleExtraordinary Items - Example
    11. 11. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-11 Income Statement Presentation: Extraordinary Items - ExampleExtraordinary Items - Example
    12. 12. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-12 Accounting ChangesAccounting Changes
    13. 13. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-13 Change in Accounting PrincipleChange in Accounting Principle Occurs when changing from one GAAP method to another GAAP method. Make a catch-up adjustment known as the cumulative effect of a change in accounting principle. The cumulative effect is reported net of taxes and after extraordinary items. Occurs when changing from one GAAP method to another GAAP method. Make a catch-up adjustment known as the cumulative effect of a change in accounting principle. The cumulative effect is reported net of taxes and after extraordinary items.
    14. 14. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-14 Also in 2003, Apex Co. decided to change from the double-declining balance to the straight-line method for depreciation. The effect of this change is an increase in net income of $65,000. Apex reported income before cumulative effect of an accounting change of $122,500 during the year. All items of income are subject to a 30% tax rate. How would this item appear on the income statement? Also in 2003, Apex Co. decided to change from the double-declining balance to the straight-line method for depreciation. The effect of this change is an increase in net income of $65,000. Apex reported income before cumulative effect of an accounting change of $122,500 during the year. All items of income are subject to a 30% tax rate. How would this item appear on the income statement? Change in Accounting Principle Example Change in Accounting Principle Example
    15. 15. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-15 Income Statement Presentation: Computation: Change in Accounting Principle Example Change in Accounting Principle Example
    16. 16. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-16 Change in EstimatesChange in Estimates Revision of a previous accounting estimate. The new estimate should be used in the current and future periods. The prior accounting results should not be disturbed. Revision of a previous accounting estimate. The new estimate should be used in the current and future periods. The prior accounting results should not be disturbed.
    17. 17. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-17 On January 1, 2000, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2003, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation. Compute the revised depreciation expense for 2003. On January 1, 2000, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2003, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation. Compute the revised depreciation expense for 2003. Change in Estimates - ExampleChange in Estimates - Example
    18. 18. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-18 Record depreciation expense of $4,200 for 2003 and subsequent years. Change in Estimates - ExampleChange in Estimates - Example
    19. 19. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-19 Let’s move on to a few final topics.
    20. 20. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-20 Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price. Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price. Let’s examine this further. Let’s examine this further. Price-earnings Ratio (P/E)Price-earnings Ratio (P/E)
    21. 21. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-21 A measure of the company’s profitability and earning power for the period. A measure of the company’s profitability and earning power for the period. Based on the number of shares issued and the length of time that number remained unchanged. Based on the number of shares issued and the length of time that number remained unchanged. Earnings Per Share (EPS)Earnings Per Share (EPS)
    22. 22. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-22 Remember that Apex Co. income from continuing operations of $350,000. The after-tax loss from discontinued operations was $175,000. The extraordinary loss was $52,500 and the cumulative effect of accounting changes was a gain of $45,500. Assume that Apex has weighted average shares outstanding of 156,250. Prepare a partial income statement showing the EPS for Income from Operations and for the other special items. Remember that Apex Co. income from continuing operations of $350,000. The after-tax loss from discontinued operations was $175,000. The extraordinary loss was $52,500 and the cumulative effect of accounting changes was a gain of $45,500. Assume that Apex has weighted average shares outstanding of 156,250. Prepare a partial income statement showing the EPS for Income from Operations and for the other special items. Earnings Per Share (EPS) - Partial Income Statement Earnings Per Share (EPS) - Partial Income Statement
    23. 23. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-23 * Rounded. Earnings Per Share (EPS) - Partial Income Statement Earnings Per Share (EPS) - Partial Income Statement
    24. 24. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-24 If preferred stock is present, subtract preferred dividends from net income prior to computing EPS. If preferred stock is present, subtract preferred dividends from net income prior to computing EPS. EPS is required to be reported in the income statement. Earnings Per Share (EPS)Earnings Per Share (EPS)
    25. 25. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-25 Declared by board of directors. Declared by board of directors. Not legally required. Not legally required. Creates liability at declaration. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Requires sufficient Retained Earnings and Cash. Accounting for Cash DividendsAccounting for Cash Dividends
    26. 26. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-26 Date of Declaration  Board of directors declares the dividend.  Record a liability. Date of Declaration  Board of directors declares the dividend.  Record a liability. Dividend DatesDividend Dates
    27. 27. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-27 Ex-Dividend Date  The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend. Ex-Dividend Date  The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend. NO ENTRY Dividend DatesDividend Dates
    28. 28. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-28 X Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Date of Record Stockholders holding shares on this date will receive the dividend. (No entry) Dividend DatesDividend Dates
    29. 29. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-29 Date of Payment Record the payment of the dividend to stockholders. Date of Payment Record the payment of the dividend to stockholders. Dividend DatesDividend Dates
    30. 30. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-30 On June 1, 2003, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. On June 1, 2003, a corporation’s board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 entry? a. Debit Retained Earnings $20,000. b. Debit Dividends Payable $20,000. c. Credit Dividends Payable $20,000. d. Credit Preferred Stock $20,000. $100 × 8% = $8 dividend per share $8 × 2,500 = $20,000 total dividend $100 × 8% = $8 dividend per share $8 × 2,500 = $20,000 total dividend Dividend Dates - QuestionDividend Dates - Question
    31. 31. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-31 All stockholders retain same percentage ownership. All stockholders retain same percentage ownership. No change in total stockholders’ equity. No change in total stockholders’ equity. No change in par values. No change in par values. Distribution of additional shares of stock to stockholders. Distribution of additional shares of stock to stockholders. Accounting for Stock DividendsAccounting for Stock Dividends
    32. 32. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-32 Small Stock Dividend Large Stock Dividend Stock Splits Total Stockholders' Equity No Effect No Effect No Effect Common Stock Increases Increases No Effect Paid-in Capital Increases No Effect No Effect Retained Earnings Decreases Decreases No Effect Number of Shares Outstanding Increases Increases Increases Par Value per Share No Effect No Effect Decreases Summary of Effects of Stock Dividends and Stock Splits Summary of Effects of Stock Dividends and Stock Splits
    33. 33. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-33 Adjust retained earnings retroactively. Adjust retained earnings retroactively. The adjustment should be disclosed net of any taxes. The adjustment should be disclosed net of any taxes. The correction of an error identified as affecting net income in a prior period. The correction of an error identified as affecting net income in a prior period. Prior Period AdjustmentsPrior Period Adjustments
    34. 34. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-34 Normally, there are 3 ways that financial position can change. Normally, there are 3 ways that financial position can change. Issuance of new shares of stock. Issuance of new shares of stock. Net Income or Net Loss Net Income or Net Loss Payment of Dividends Payment of Dividends GAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments. GAAP excludes some unrealized items from income, such as the change in market value of available-for-sale debt and equity investments. Comprehensive IncomeComprehensive Income
    35. 35. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-35 GAAP requires that unrealized items that are normally reported on the balance sheet be added back to compute “Comprehensive Income.” GAAP requires that unrealized items that are normally reported on the balance sheet be added back to compute “Comprehensive Income.” As a second Income statement. As a second Income statement. Combined with Net Income on the Income Statement. Combined with Net Income on the Income Statement. As an element of Stockholders’ Equity. As an element of Stockholders’ Equity. The accumulated amount of changes affecting Comprehensive Income is reported in equity. The accumulated amount of changes affecting Comprehensive Income is reported in equity. There are 3 options for reporting Comprehensive Income. There are 3 options for reporting Comprehensive Income. Comprehensive IncomeComprehensive Income
    36. 36. © The McGraw-Hill Companies, Inc., 2002McGraw-Hill/Irwin Slide 2-36 Hang in there! We’re coming down the home stretch! Yeah, that’s easy for you to say! End of Chapter 12
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