© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-1 INCOME AND CHANGES IN RETAINED EARNINGS Chapter 12

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-2 Reporting the Results of Operations Information about net income can be divided into two major categories Income from continuing operations. 1. The results of discontinued operations 2. The impact of extraordinary items. 3. The effects of changes in accounting principles. Normal, recurring revenue and expense transactions. Unusual, nonrecurring events that affect net income.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-3

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-4 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. Discontinued Operations

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-5 Extraordinary 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.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-6 Change 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.

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-7 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. Earnings Per Share (EPS)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-8 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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 12-9 * Rounded. Earnings Per Share (EPS) - Partial Income Statement

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 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)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company’s stock price. Price-earnings Ratio (P/E)

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Declared by board of directors. Not legally required. Not legally required. Creates liability at declaration. Requires sufficient Retained Earnings and Cash. Accounting for Cash Dividends

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide 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 Dates

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Date of Record l Stockholders holding shares on this date will receive the dividend. (No entry) Date of Record l Stockholders holding shares on this date will receive the dividend. (No entry) Dividend Dates

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide Date of Payment l Record the payment of the dividend to stockholders. Date of Payment l Record the payment of the dividend to stockholders. Dividend Dates

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide On June 1, 2001, 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, 2001, 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. Dividend Dates - Question $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

© The McGraw-Hill Companies, Inc., 2003 McGraw-Hill/Irwin Slide All stockholders retain same percentage ownership. No change in total stockholders’ equity. No change in par values. Distribution of additional shares of stock to stockholders. Accounting for Stock Dividends