1. CHAPTER 11 Corporate Reporting:
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Corporate Reporting:
Income, Earnings Per Share, and Retained Earnings
CHAPTER 11
Slides Content
1-2 Learning objectives
3-9 Reporting income information
Share dividends
Mini-quiz
Share splits
Repurchase of shares
EPS
Retained earnings
Review
Appendix 16A
End of chapter

2. Learning Objectives
Explain the form and content of a comprehensive corporate income statement.
Describe and account for share dividends and share splits.
Describe and account for retirement of shares.
Calculate earnings per share and describe its use.
Explain the items reported in retained earnings.
Record the purchase and reissue of treasury shares (Appendix 16A).

3. Reporting Income Information
Income statements are used to evaluate past performance and predict future performance.
Certain activities that are not part of a company’s normal, continuing activities are reported separately.
Separating these other activities makes the income statement more useful to users.

4. Reporting Income Information
The income statement is divided into the following sections:
Continuing Operations
Discontinued Operations
Extraordinary Items
Earnings Per Share

5. Continuing operations
Discontinued operations
Extraordinary items
Earnings per share

6. Continuing operations
Shows the revenues, expenses, and income generated by the company’s day-to-day operating activities.

7. The gain or loss from selling or closing down a segment.
Shows:
The income from operating the discontinued segment prior to its disposal, and
The gain or loss from selling or closing down a segment.
Discontinued operations

8. Shows items that meet the following criteria:
They are not expected to occur frequently over several years,
They do not typify the normal activities of the entity, and
They do not depend primarily on the decisions or determinations by management or owners.
Extraordinary items

9. Shows the amount of income earned by a company’s outstanding common shares.
Earnings per share

10. Share Dividends
A corporation’s distribution of its own shares to its shareholders without receiving payment in return.

11. Share Dividends
Transfer a portion of equity from retained earnings to contributed capital.
Do not reduce a corporations’ assets or shareholders’ equity.

12. Share Dividends Keeps the market price of the stock affordable.
Reasons:
Keeps the market price of the stock affordable.
Conserves cash for business expansion.
Provides evidence of management’s confidence that the company is doing well.

13. Illustration: Share Dividends
The directors of X-Quest declare a 10% share dividend on December 31, The company currently has 10,000 shares outstanding and the market price of the shares is $15 per share. The dividend is to be distributed on January 20 to the shareholders of record on January 15.
The amount of the share dividend is calculated as follows:
Share dividend = (# of common shares outstanding x percentage x market price per share)
= 10,000 shares x 10% x $15 per share
= $15,000

14. Illustration: Share Dividends
On December 31, the date of declaration, the entry would be:
Share Dividends ,000
Common Share Dividends Distributable ,000 or
Retained Earnings ,000

15. Illustration: Share Dividends
On December 31, the company’s year-end, one of the closing entries would be:
Retained Earnings ,000
Share Dividends ,000
This entry would not be necessary if the Retained Earnings account was debited on the date of declaration.

16. Illustration: Share Dividends
No entry is required on January 15, the date of record.
On January 20, the date of distribution, the entry would be:
Common Share Dividends Distributable ,000
Common Shares ,000

17. Illustration: Share Dividends
X-Quest Ltd.
Shareholders Equity
Dec. 31, 2011
Before Declaration
of Dividend
Jan. 20, 2012
After Declaration
Contributed capital:
Common shares, unlimited shares authorized
Dec. 31, 2011: 10,000 shares issued and outstanding
$108,000
Jan. 20, 2011: 11,000 shares issued and outstanding
$123,000
Retained earnings
35,000
20,000
Total shareholders’ equity
$143,000
$15,000 has been transferred from Retained Earnings to Contributed Capital.

18. Mini-Quiz A stock dividend:
Reduces a corporation's assets and shareholders' equity.
Does not reduce a corporation's assets and shareholders' equity.
Transfers a portion of equity from retained earnings to contributed capital.  
Both B and C.
Both A and C.

19. Mini-Quiz A stock dividend:
Reduces a corporation's assets and shareholders' equity.
Does not reduce a corporation's assets and shareholders' equity.
Transfers a portion of equity from retained earnings to contributed capital.  
Both B and C.
Both A and C.

20. Share Splits
An act by a corporation to call in its shares and replace each share with more than one new share.

21. Share Splits
No journal entry is necessary but note disclosure of the split is required.
The Contributed Capital and Retained Earnings accounts are unchanged by a share split.
The number of shares changes with a share split.
The market value and the book value per share will decrease after a share split.

22. Repurchase of Shares Reasons:
Corporations may repurchase shares of its own outstanding share capital.
Reasons:
To avoid a hostile takeover by an investor,
To maintain a strong and stable market for the shares, or
To show that management has confidence in the price of the shares.

23. The entry on May 1 would be: Common Shares 12,000 Cash 12,000
Illustration: Repurchase of Shares
Delta Inc. originally issued its shares at an average price of $12.
On May 1, the company purchased and retired 1,000 of its shares at the same price for which they were issued.
The entry on May 1 would be:
Common Shares ,000
Cash ,000

24. The entry on June 1 would be: Common Shares 6,000 Cash 5,500
Illustration: Repurchase of Shares
On June 1, the company retires 500 common shares, paying $11, which is less than the $12 average issue price.
The entry on June 1 would be:
Common Shares ,000
Cash ,500
Contributed Capital from
Retirement of Common Shares

25. The entry on July 5 would be: Common Shares 24,000
Illustration: Repurchase of Shares
On July 5, the company retires 2,000 common shares, paying $15, which is more than the $12 average issue price.
The entry on July 5 would be:
Common Shares 24,000
Contributed Capital from
Retirement of Common Shares* 500
Retained Earnings 5,500
Cash 30,000
*This brings the account balance to $0.

26. Earnings Per Share (EPS)
EPS is one of the most widely cited items of accounting information.
Basic earnings
per share =
(Net income ­ Preferred dividends) Weighted-average common shares outstanding

27. Earnings Per Share (EPS)
Basic earnings
per share
(Net income - Preferred dividends)* Weighted-average common shares outstanding** =
*Preferred dividends declared in current year unless preferred shares are cumulative. If the shares are cumulative, then dividends are subtracted regardless of whether they have been declared.
**The number of shares outstanding are restated when there are share dividends or stock splits. The number of shares are restated as if the dividend or stock split occurred at the start of the year.

28. Statement of Retained Earnings
Shows how the Retained Earnings account changes over the accounting period.
May be combined with the income statement.

29. Restricted Retained Earnings
Restrictions that cause a portion of retained earnings not to be available for dividends and share repurchases.
Types:
Statutory
Contractual
Voluntary

30. Accounting Changes Types: Change in Accounting Policy or Principle
Correction of Error(s) in Prior Financial Statements
Changes in Estimates

31. Accounting Changes Accounting Change Accounting Treatment
Change in Accounting Policy or Principle
Retroactive restatement of financial statements,
Disclosure,
New policy or corrected amount is reported in current years’ operating results, and
Adjust opening balance of Retained Earnings.
Corrections of Error(s) in Prior Financial Statements
Change in Estimate
Accounted for in period of change and future.

32. Review
Explain the form and content of a comprehensive income statement.
A comprehensive income statement has four potential sections: (1) continuing operations, (2) discontinued segments, (3) extraordinary items, and (4) earnings per share. Many corporations only report items from continuing operations and earnings per share. The other items are only included in the years in which they occur.

33. Review Describe stock dividends and stock splits.
Both stock splits and stock dividends divide a company's outstanding shares into smaller pieces. The total value of the company is unchanged, but the price of each new share is smaller. Stock dividends and stock splits do not transfer any of the corporation's assets to shareholders. Stock splits and stock dividends distribute additional shares to shareholders according to their percentage of ownership.

34. Treasury Shares Appendix 16A
Are shares that were reacquired and are still held by the issuing corporation.
Treasury shares:
Have been issued but are not outstanding.
Do not receive dividends.
Do not have voting rights.
Reduce the corporation’s assets and shareholders’ equity.

35. Illustration: Treasury Shares
On May 2, Cyber purchased 1,000 of its own common shares at $11.50 per share.
The entry on May 2 would be:
Treasury Shares, Common ,500
Cash ,500

36. Illustration: Treasury Shares
On May 20, Cyber reissued 100 of the treasury shares at $11.50 per share, their cost.
The entry on May 20 would be:
Cash ,150
Treasury Shares, Common ,150
On June 3, Cyber reissued 400 of the treasury shares at $12 per share, which is above their cost.
The entry on June 3 would be:
Cash ,800
Treasury Shares, Common ,600*
Contributed Capital, Treasury Shares
*(400 shares x $11.50 per share)

37. Illustration: Treasury Shares
On July 10, Cyber reissued 300 of the treasury shares at $11.00 per share, which is below their cost.
The entry on July 10 would be:
Cash ,300
Contributed Capital, Treasury Shares
Treasury Shares, Common ,450*
*(300 shares x $11.50 per share)

38. Illustration: Treasury Shares
On July 15, Cyber reissued 100 of the treasury shares at $10.00 per share, which is below their cost.
The entry on July 15 would be:
Cash ,000
Contributed Capital, Treasury Shares
Retained Earnings
Treasury Shares, Common ,150*
*(100 shares x $11.50 per share)
The difference between the purchase price and the reissue price is applied to the Contributed Capital, Treasury Shares account and then to Retained Earnings.

39. End of Chapter