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12

  1. 1. 12 Special Income, Investment & Reporting Issues
  2. 2. LEARNING GOALS 1 Prepare income statement reporting unusual items .
  3. 3. LG 1 What is significance of “ Income From Continuing Operations ?”
  4. 4. EXHIBIT 1 LG 1
  5. 5. INCOME FROM CONTINUING OPERATIONS <ul><li>Reports income from normal operations </li></ul><ul><ul><li>Expected to continue </li></ul></ul><ul><ul><li>Used to estimate future income </li></ul></ul><ul><li>Focal point for analyzing income trends </li></ul>LG 1
  6. 6. EXAMPLES: Unusual Items Below Income from continuing operations <ul><li>Items that adjust income from continuing operations </li></ul><ul><ul><li>Discontinued operations </li></ul></ul><ul><ul><ul><li>Gain, loss from disposing of business segment </li></ul></ul></ul><ul><ul><li>Extraordinary item </li></ul></ul><ul><ul><ul><li>Unusual and infrequent event, transactions </li></ul></ul></ul><ul><ul><li>Changes in accounting principles </li></ul></ul>LG 1
  7. 7. Unusual Items Below the Line LG 1
  8. 8. LEARNING GOALS 2 Prepare income statement reporting earnings per share data .
  9. 9. LG 2 What is earnings per share? Basic earnings per share reports the net income earned by 1 share of common stock.
  10. 10. EARNINGS PER SHARE: Calculation with Preferred Stock LG 2 Earnings per share = (Net income – Preferred Stock Dividends ) / # Shares Common Stock Outstanding
  11. 11. EXERCISE 12-12 Glow-Rite Lighting Co. had earnings of $740,000. The company had 125,000 shares common stock & 50,000 shares of $100 par value preferred stock with $6 per share dividend. Calculate basic earnings per share. LG 2 EPS = (Net Income – P/S Dividend) / # Shares C/S ($740,000 - $6*50,000)/125,000 = $3.52
  12. 12. LEARNING GOALS 3 Describe accounting for investments in stocks .
  13. 13. LG 3 Why do companies invest in equity securities of other companies? Companies invest in equity securities short term to earn a return & long term to gain control.
  14. 14. TEMPORARY INVESTMENT IN STOCKS <ul><li>Short term investment in equity securities </li></ul><ul><ul><li>Trading securities are actively traded </li></ul></ul><ul><ul><li>Available-for-sale securities </li></ul></ul><ul><ul><ul><li>Not actively traded but expected to be sold </li></ul></ul></ul><ul><ul><li>Earn dividend revenue </li></ul></ul><ul><li>Reported as “Marketable Securities” in current assets </li></ul>LG 3
  15. 15. REPORTING TEMPORARY INVESTMENTS <ul><li>Temporary investments reported at fair market value </li></ul><ul><ul><li>Recognize differences between fair market value and book value </li></ul></ul><ul><ul><li>Record unrealized holding gain/loss </li></ul></ul>LG 3
  16. 16. REPORTING TEMPORARY INVESTMENTS: Example Crabtree Co. LG 3 $42,000 Net after taxes ($18,000) Income Taxes $60,000 $750,000 $690,000 Total <10,000> 150,000 160,000 Bass 30,000 210,000 180,000 Inis ---- 200,000 200,000 SWS $40,000 $190,000 $150,000 Edwards Unrealized Gain (Loss) Market Cost Common Stock
  17. 17. Temporary investments reported with unrealized gain/loss net of tax LG 3
  18. 18. LONG-TERM INVESTMENT IN STOCKS <ul><li>Long-term investment in equity securities </li></ul><ul><ul><li>Reported in Investments section of long term assets </li></ul></ul><ul><ul><ul><li>Without significant influence (< 20% ownership), reported at fair market value </li></ul></ul></ul><ul><ul><ul><ul><li>Reported like available-for-sale securities </li></ul></ul></ul></ul><ul><ul><ul><li>With significant influence, use equity method </li></ul></ul></ul>LG 3
  19. 19. REPORTING UNDER EQUITY METHOD <ul><li>Stock purchase recorded at cost </li></ul><ul><li>Subsequently adjusted by the following </li></ul><ul><li>Increased by Investee share in net income </li></ul><ul><li>Decreased by Cash dividends received </li></ul>LG 3
  20. 20. LG 3 Are equity securities only reported on the balance sheet? GAAP requires companies to explain investment policies in a footnote to financial statements.
  21. 21. eBay SECURITIES FOOTNOTE <ul><li>Short- and long-term investments, which include marketable equity securities, municipal, government and corporate bonds, are classified as available-for-sale and reported at fair value using the specific identification method. Realized gains and losses are included in earnings and were immaterial in all periods presented. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits. </li></ul>LG 3
  22. 22. INVESTMENT IN BONDS <ul><li>Investments in bonds are reported as </li></ul><ul><ul><li>Available-for-sale securities in Current Assets if held for sale </li></ul></ul><ul><ul><li>Held-to-maturity securities in Investments if intended to be held for life </li></ul></ul><ul><ul><ul><li>Reported at amortized cost </li></ul></ul></ul>LG 4
  23. 23. LG 4 How does a company record an investment in bonds if A $1,000 bond cost 102 + $5.30 brokerage fee + $10.20 accrued interest?
  24. 24. LEARNING GOALS 5 Compute, interpret price-earnings, price-book ratios .
  25. 25. LG 5 How does an investor compare market price of different stock investments? Investors use Price-earnings ratio and Price-book ratio to compare investments.
  26. 26. PRICE-EARNINGS RATIO <ul><li>Explains stock price as a multiple of earnings </li></ul>LG 5 Price-Earnings Ratio (PE) = Market Price per Share / Earnings per Share (EPS)
  27. 27. PRICE-EARNINGS RATIO: eBay LG 5 99 1.18 116.34 2004 94 0.69 64.61 2003 79 0.43 33.91 2002 PE EPS Market price per share 12/31
  28. 28. PRICE-EARNINGS RATIO: eBay LG 5 PE 77.50 82.07 Market price per share 3M Fastenal PE EPS Market price per share EPS 12/31 4.18 3.83 1.10 36.20 2005 .86 28.83 2004
  29. 29. PRICE-EARNINGS RATIO: eBay LG 5 18.5 21.4 PE 77.50 82.07 Market price per share 3M Fastenal PE EPS Market price per share EPS 12/31 4.18 3.83 32.9 1.10 36.20 2005 33.5 .86 28.83 2004
  30. 30. PRICE-EARNINGS RATIO: eBay LG 5 For which company are investors more optimistic? 18.5 21.4 PE 3M Fastenal PE 12/31 32.9 2005 33.5 2004
  31. 31. PRICE-BOOK RATIO <ul><li>Explains stock price as a multiple of book value of a company’s stock </li></ul>LG 5 Price-Book Ratio = Market Price per Share / Book value per Share
  32. 32. <ul><li>eBay’s Price-Book ratio for 2004 would be </li></ul><ul><li>$116 / $10.20 = </li></ul><ul><li>11.37 </li></ul><ul><li>What does this ratio value mean? </li></ul>ANALYZING PRICE-BOOK RATIO LG 5

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