1. Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD Chapter 16 Corporate Reporting

2. Income Statement NOTE: This chapter is reviewed somewhat in reverse compared to the text We’ve seen the income statement before. –What’s new here is that the income statement is not only used to report net income from continuous operations, but also for “discontinued operations” and “extraordinary items” Discontinued Operations – Operations that cease to operate, at least as far as this business is concerned. Resulting from: –Sale –Disposal, or shut down Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

3. Income Statement Extraordinary Items –These are events resulting in income or loss. They have 3 inclusive characteristics Not expected to occur frequently over several years Not part of normal business activity for this business Does not depend on management decision making Look at Exhibit 16.13. Notice that: –The top section is income from continuing operations –Mid section is discontinued operations –Bottom section is Extraordinary items –The lowest section is Earnings Per Share Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

4. Additional Share Transactions Companies can be very creative with all the stuff that they can do with respect to share transactions. Not only can they sell shares, but they can –Issue a share dividend –Split shares –Repurchase shares Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

5. Share Dividend Dividends can be issued by paying a Share Dividend –This is the issue of more shares to shareholders which they can either keep or sell in the open market –Issuing a cash dividend reduces cash and shareholder equity –Issuing a share dividend does neither of these but can dilute individual shareholder’s ownership and reduce the market stock price of the shares Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

6. Share Splits Share Splits is the distribution of more shares to shareholders according to their current percentage of ownership. Splits do not have to be a 2 for 1, but for almost any ratio (3 for 2, 5 for 4, etc) There are no journal entries for share splits as they do not affect the equity accounts A share split will increase the number of shares in the market but correspondingly reduce the value of those shares so that the total company market capitalization remains the same Market capitalization = Total Shares Outstanding x Price per share Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

7. Repurchase of Shares Companies may repurchase their shares on the open market –When repurchasing shares, the shares must be retired. A company cannot trade in its own shares –Corporations buy back their own shares to Avoid a hostile take over To reduce shares in the market there by increasing share value Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

8. Earnings Per Share Earnings Per Share (EPS) is the amount of income earned by each share of a company's outstanding common shares EPS = (Net Income – Preferred Dividends)/Weighted Avg No. of Common Shares The top portion denotes the amount of cash after ALL “expenses” (dividends are not an expense, but…) accruing to the common shareholders (the true owners of the business) Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD

9. Earnings Per Share The Weighted Average No. of Common Shares is used because there could be events during the year that change the quantity that are outstanding –Issuing more shares –Issuing share dividends –Share splits –Retirement (repurchase) of shares A company may also choose to show an EPS figure based on the total quantity of shares that could be outstanding –This means the company calculates a theoretical total number of shares that could be sold, converted, exercised from options etc, then calculates a “Fully Diluted” EPS Financial Accounting Dave Ludwick, P.Eng, MBA, PMP, PhD