Chapter 13 Corp' Income Statement

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Chapter 13 Corp. Income Statement Statement of
Stockholders Equity

• Understand Quality of Earnings
• Prepare a Corporate Income Statement
• Describe D-E-A
• Compute EPS
• Define Comprehensive Income
• Understand income tax accounts

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Chapter 13 Corp. Income Statement Statement of
Stockholders Equity

• Prepare a Statement of Stockholders Equity
• Account for stock dividends and stock splits
• Calculate Book Value per share

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Quality of Earnings (Earning Power)

• The value of a company is a function of its
  future cash flows.

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Quality of Earnings

• The substance of earnings
• And their sustainability into the future.

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Affected by. . . .

• Accounting methods estimates
• Industry dependent
• Requires FULL DISCLOSURE CONSISTENCY
• Non operating items on the Income Statement
• Look at the D-E-A

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Comprehensive Income

• Most revenues, expenses, gains, and losses
  recognized during the period are included in net
  income.
• Plus
• Discontinued Operations
• Extraordinary Items
• Accounting Changes.
• Plus changes in unrealized investment gains and
  losses

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Irregular Items

• Three types of irregular items are reported --
  (all net of taxes)

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Discontinued Operations...

• Refers to the disposal of a significant
  segment of a business...
• the elimination of a major class of customers or
  an entire activity.

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Examples

• Pepsi spun off Taco Bell, Pizza Hut, and KFC
• Quaker Oats spun off Gatorade
• Western Wireless spun off Voicestream
• PACCAR spun off Paccar Automotive and Trico
  (oil well digging manufacturer)

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Discontinued Operations

• Assume a company, Agroworld Inc. During 2001 the
  company discontinued and sold its chemical
  division.
• The income in 2001 from chemical operations was
  200,000, and
• The loss on disposal of the chemical division
  130,000.
• Apply a 30 tax rate

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Discontinued Operations

• Or, I could word this
• During 2001 the company discontinued and sold its
  chemical division.
• The income in 2001 from chemical operations (net
  of 60,000 taxes) was 140,000, and
• The loss on disposal of the chemical division
  (net of 39,000 taxes) was 91,000.

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• Agroworld Inc.
• Income Statement (Partial)
• For the Year Ended December 31, 2001
• Income before income taxes 800,000
• Income tax expense (30 Tax Rate) 240,000
• Income from continuing operations 560,000
• Discontinued operations
• 1) Income from operations of chemical
  division, net of taxes, 60,000
  
  
  140,000
• 2) Loss from disposal of chemical
  
  division, net of 39,000 income
  tax saving (91,000) 49,000
• Net income before extraordinary item 609,000

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Extraordinary Items...

• Are events and transactions that meet two
  conditions
• Unusual in nature
• Infrequent in occurrence

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Extraordinary Items
Illustration 14-2
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Ordinary Items
Illustration 14-2
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Extraordinary Items

• In 2001 a revolutionary foreign government
  expropriated property held as an investment by
  Agroworld Inc.
• The loss is 70,000 before applicable income
  taxes of 21,000, the income statement
  presentation will show a deduction of 49,000.

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• Agroworld Inc.
• Income Statement(Partial)
• For the Year Ended December 31, 2001
• Income before income taxes 800,000
• Income tax expense 240,000
• Income from continuing operations 560,000
• Discontinued operations
• Income from operations of chemical
  division, net of taxes, 60,000
  140,000
• Loss from disposal of chemical
  division,
  net of 39,000 income
  tax saving (91,000) 49,000
• Net income before extraordinary item 609,000
• Extraordinary item
• Expropriation of investment, net of
  21,000 income tax saving
  49,000
• Net income 560,000

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Change in Accounting Principle

• Is permitted, when
• New principle is PREFERABLE to the old and
• Effects are clearly DISCLOSED in the income
  statement.

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Change in Accounting Principle

• Examples
• a change in depreciation methods (such as
  declining-balance to straight-line)
• a change in inventory costing methods (such as
  FIFO to average cost).

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Change in Accounting Principle

• Use new principle in results of operations of the
  current year.
• The cumulative effect of the change on all
  prior-year income statements should be disclosed
  net of applicable taxes in a special section
  below Net Income.

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• Review and STOP HERE!

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Changes in Accounting Principle

• At beginning of 2001, Agroworld Inc. changes
  from straight-line to double declining-balance
  method for equipment purchased on January 1,
  1998.
• Question Which method results in higher
  depreciation expense????
• The double declining-balance method.

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Changes in Accounting Principle

• The cumulative effect on prior-year income
  statements (statements for 1998-2000) is to
  increase depreciation expense and decrease income
  before income taxes by 24,000.
• If there is a 30 tax rate, what is the
  net-of-tax (after taxes) effect?
• The net-of-tax effect of the change is 16,800
  (24,000 x 70).

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• Agroworld Inc.
• Partial Income Statement
• For the Year Ended December 31, 2001
• Income before income taxes 800,000
• Income tax expense 240,000
• Income from continuing operations 560,000
• Discontinued operations
• Income from operations of chemical
  division, net of taxes, 60,000
  140,000
• Loss from disposal of chemical
  division,
  net of 39,000 income
  tax saving (91,000) 49,000
• Net income before extraordinary item 609,000
• Extraordinary item
• Expropriation of investment, net of
  21,000 income tax saving
  (49,000)
• Cumulative effect of change in accounting
  principle
• Effect on prior years of change in
  depreciation method, net of 7,200 tax
  (16,800)
• Net Income
  543,200

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Earnings Per Share (EPS)

• Indicates net income earned on each share of
  common stock sales

Income available to common stockholders Average
number of outstanding common shares
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EPS Agroworld assume 200,000 shares o/s

• Continuing Operations 2.80
• Discontinued operations .24
• Extraordinary Loss (.24)
• Cum. Effect of Acct. Change (.08)
• Total EPS 2.72
• How do you compare to next year?

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EPS Agroworld, next year

• last this
• Continuing Operations 2.80 2.10
• Discontinued operations .24 1.24
• Extraordinary Loss (.24) (.24)
• Cum. Effect of Acct. Change (.08) (.08)
• Total EPS 2.72 3.02
• Have you improved over last year?

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A Review - Net of Taxes

• You exclude taxes involved in
• D-E-A from Continuing Ops. (They do not involve
  Continuing Ops)
• You do include them in the D-E-A items (which are
  reported below Continuing Ops).

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Income Tax Accounts

• Income tax expense a company MUST recognize
  using Accrual Accounting (whats due based on
  accrual income, based on tax rate )
• Income tax payable Amount actually due the IRS
  based on tax laws (whats due the 15th, based on
  1040 taxable income for this year)
• Deferred Income taxes The difference
• Why is there a difference?????

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Income Tax Accounts

• Income tax expense 144,500
• Income tax payable 92,000
• Deferred Inc. taxes 52,500
• To record estimated and deferred income taxes.
• What did we ACTUALLY Pay the IRS??

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Statement of Stockholders Equity

• More common than Statement of Retained Earnings
• Shows components and activity

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Retained Earnings...

• Net income retained in the business.
• They are NOT assets.
• They are part of the stockholders' claim on the
  total assets of the corporation.

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Deficit...

• Is a debit balance in retained earnings and is
  reported as a deduction in the stockholders'
  equity section of the balance sheet.
• Also called Accumulated Deficit

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Retained Earnings Restrictions...

• Are legal, contractual or voluntary
  circumstances that make a portion of retained
  earnings currently unavailable for dividends.

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A Stock Dividend...

• A proportional distribution
• Is paid in stock.
• Decreases Retained Earnings
• Increases Contributed Capital.
• Does not change total stockholders' equity or
  total assets.
• A good alternative for Cash POOR companies.

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Reasons for Stock Dividends

• To satisfy stockholders' dividend expectations
  without spending cash.
• To decrease market price per share.
• To increase permanent capital.

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Stock Dividends

• You have a 2 ownership interest in Cetus Inc.,
  owning 20 of its 1,000 shares of common stock.
• In a 10 stock dividend, you would receive two
  shares (2 x 100)
• Your ownership interest would remain at 2 (22
  /1,100).
• You now own more shares of stock, but your
  ownership interest has not changed.

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Stock Dividends

• A small stock dividend (less than 20-25 of the
  corporation's O/S stock) is recorded at the FMV
  per share
• A large stock dividend (greater than 20-25 of
  the corporation's O/S stock) is recorded at par
  value per share.

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Stock Dividends

• Medland Corporation has 300,000 in retained
  earnings and declares a 10 stock dividend on its
  50,000 shares of 10 par value common stock.
• The current fair market value of the stock is 15
  per share.

Stk. Div. Declared 75,000 Common Stock
50,000 DistributablePaid-in
Capital in Excess 25,000
of Par Value
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Stock Dividends

• Medland Corporation pays the dividend. (5,000 _at_
  10)

• Common Stock 50,000
• Distributable Common Stock
  50,000

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What did we do?

• Permanently MOVED 75,000 from Retained Earnings
  ? Contributed Capital.
• Increased of O/S shares to 55,000

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Stock Split...

• Issuance of additional shares of stock to
  stockholders accompanied by
• A reduction in the par or stated value.
• An increase in number of shares.
• A stock split has NO effect on total
• contributed capital
• retained earnings
• total stockholders' equity

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Stock Split

• Because a stock split does not affect the
  balances in stockholders' equity accounts, it is
  not necessary to journalize a stock split.

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BOOK VALUE

• Total Stockholders Equity
• Shares Outstanding
• If a company has BOTH preferred AND common stock,
  calculation more involved. . .
• Need to deduct Call Value and Dividends In
  Arrears

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Comprehensive Income

• Most revenues, expenses, gains and losses are
  INCLUDED in income. But there are exceptions.
  (see SFA 130)
• Foreign currency translation adjustments
• Unrealized gains and losses on available-for-sale
  securities are excluded from net income because
  disclosing them separately -

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• Review and STOP HERE!

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Available-for-sale securities. . .

• Reported in Comprehensive Income
• reduces the volatility of net income due to
  fluctuations in fair value, yet
• informs the financial statement user of the gain
  or loss that would be incurred if the securities
  were sold at fair value.

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Comprehensive Income

• The FASB now requires that, in addition to
  reporting net income, a company must also report
  comprehensive income.
• Since 1998, many companies report as separate
  statement.

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• Thats all she wrote. . .

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