Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 1
22 The Income Statement, the Statement of Comprehensive Income, & the Statement of Stockholders’ Equity Chapter 11
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 3 Evaluate quality of earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 4 Earnings Quality
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 5 Revenue Recognition Revenue is recognized when earned
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 6 Cost of Goods Sold and Gross Profit
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 7 Operating and Other Expenses Largest operating expenses include salaries, wages, utilities, and supplies The lower the cost relative to sales, the more efficiently management is operating the business Cutting costs can either help or hurt the bottom line
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 8 Account for foreign-currency gains and losses
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 9 International Transactions JOURNAL DateAccountsDebitCredit 7-28 Accounts Receivable (1 million pesos x $0.086)86,000 Sales86, Cash (1 million pesos x $0.083)83,000 Foreign currency transaction loss3,000 Accounts Receivable86,000
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 10 International Transactions JOURNAL DateAccountsDebitCredit 9-15 Inventory (20,000 Swiss francs x $1.15)23,000 Accounts payable23, Accounts payable23,000 Cash (20,000 Swiss francs x $1.10)22,000 Foreign-currency transaction gain1,000
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 11 Reporting Foreign-Currency Gains & Losses Gains and losses netted ▫Shown as Other Revenue or Expense Income Statement (Partial) Other Expenses and Losses: Foreign-Currency Transaction Loss, net$2,000 $3,000 loss less $1,000 gain
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 12 Account for other items on the income statement
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 13 Interest expenseInterest income Cost of borrowing moneyReturn earned on invested money Interest Expense and Interest Income
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 14 Corporate Income Taxes Income tax expense Income before taxes Income tax rate From the income statement Income tax payable Taxable income From the tax return Income tax rate Income Statement account Balance sheet account
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 15 Exercise 11-19A JOURNAL DateAccountsDebitCredit Income Tax Expense ($500,000 x 40%)200,000 Deferred Tax Liability24,000 Income Tax Payable ($440,000 x 40%)176,000 Income taxes paid
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 16 Exercise 11-19A Deferred tax liability 32,000 24,000 56,000
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 17 Value of Corporate Stock Estimated value of common stock Estimated future annual income Investment capitalization rate Current market value of company Number of common shares outstanding Current market price per share
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 18 Investment Decision Rule If the estimated value of the company Decision Exceeds Current market value of the company Buy the stock because the price may go up Equals Hold the stock because the price will hold steady Is less than Sell the stock because the price may go down
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 19 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
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 20 Change in estimatesChange in principles Examples: ▫Estimated life of plant asset ▫Percent uncollectible of receivables Report new amounts for current and future periods Example: ▫Change in inventory method (FIFO to LIFO) Report retrospectively ▫Prior period amounts are restated Accounting Changes
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 21 Compute earnings per share
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 22 Earnings per Share (EPS) Net income minus Preferred Dividends Average # of Common Shares Outstanding Key measure of business success
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 23 Exercise 11-20A Preferred stock $20 par, 2%, 11,000 shares issued$220,000 Common stock, $2.50 par, 1,100,000 shares issued2,750,000 Treasury stock, common, 120,000 shares at cost480,000 Preferred Dividend = $220,000 x 2% $4,400 Common shares outstanding = shares issued less treasury shares 1,100,000 – 120,000 = 980,000
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 24 Exercise 11-20A Net Income minus Preferred Dividends Average # of Common Shares Outstanding Earnings per share 980,000 $6,200,000 – $4,400 $6.32
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 25 Correcting Retained Earnings Prior period adjustments ▫Corrections to Retained Earnings for errors of an earlier period Revenue or expense recorded incorrectly in an earlier period ▫Correction of error adjusts beginning balance of retained earnings
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 26 Analyze the statement of comprehensive income and the statement of stockholders’ equity
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 27 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 Reported: ▫Separate statement OR ▫Combined with net income in unified statement of comprehensive income
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 28 Statement of Stockholders’ Equity Column for each element of equity Row for each transaction that affected equity Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income Treasury stock Beginning balance + Net earnings + or - Accumulated other comprehensive income + Issuance of stock - Repurchase of stock - Dividends
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 29 Differentiate management’s and auditors’ responsibilities in financial reporting
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 30 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 ▫Internal controls determined to be effective ▫Internal controls audited by outside auditors
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 31 Auditor’s Report CPAs examine financial statements of publicly- traded companies Auditors determine if statements comply with GAAP ▫Decide if internal controls meet standards Combined report issued on the financial statements and system of internal controls Audit adds credibility to financial statements and internal control system
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 32
Copyright ©2012 Pearson Education Inc. Publishing as Prentice Hall. 33