Financial&managerial accounting_15e williamshakabettner chap 12

8/14/2019 Financial&managerial accounting_15e williamshakabettner chap 12

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Copyright 2010 by The McGraw-Hill Companies, Inc. AllMcGraw-Hill/Irwin

Income and Changes inIncome and Changes in

Retained EarningsRetained EarningsChapter 12


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12-2

Information about net income can be

divided into two major categories

Information about net income can be

divided into two major categories

Income from

continuing

operations.

Reporting the Results ofReporting the Results of

OperationsOperations


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12-3

When management enters into a formal plan tosell or discontinue a segmentof the business, the

related gains and losses must be disclosed on the

income statement.

Discontinued OperationsDiscontinued Operations

DiscontinuedOperations


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12-4

A segment must be a separate line

of business activity or an

operation that services a distinct

category of customers.

Discontinued OperationsDiscontinued Operations

When management enters into a formal plan to

sell or discontinue a segmentof the business,

the related gains and losses must be disclosed

on the income statement.


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12-5

Extraordinary ItemsExtraordinary Items

Material in amount.Gains or losses that are

both unusual in nature

and not expected torecur in the foreseeablefuture.

Reported net of relatedtaxes.


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12-6

During 2009, Matrix, Inc. experienced a lossDuring 2009, Matrix, Inc. experienced a loss

of $75,000 due to an earthquake at one of itsof $75,000 due to an earthquake at one of its

manufacturing plants in Chicago. This wasmanufacturing plants in Chicago. This was

considered an extraordinary item. Theconsidered an extraordinary item. The

company reported income beforecompany reported income before

extraordinary item of $1,575,000. All gainsextraordinary item of $1,575,000. All gains

and losses are subject to a 30% tax rate.and losses are subject to a 30% tax rate.How would this item appear on the 2009How would this item appear on the 2009

income statement?income statement?

Extraordinary ItemsExtraordinary Items


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A measure of the companys 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)Earnings Per Share (EPS)


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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)Earnings Per Share (EPS)


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All stockholders retain

same percentage

ownership.

No change in total

stockholders equity.

No change in par

values.

Stock DividendsStock Dividends

Distribution of additional shares of

stock to stockholders.


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Reasons for StockReasons for Stock

DividendsDividendsManagement often finds stockdividends appealing because theyallow management to distributesomething of perceived value to

stockholders while conserving cashwhich may be needed for other

purposes.Stockholders like stock dividends

because they receive more shares,often the stock price does not fall

proportionately, and the dividend isnot subject to income taxes (until the

shares received are sold).


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Distinction between StockDistinction between Stock

Splits and Stock DividendsSplits and Stock Dividends

The difference between a stock dividend and astock split lies in the intent of management andthe related issue of the size of the distribution. A

stock dividend usually is intended to substitutefor a cash dividend and is small enough that themarket price of the stock is relatively unaffected.

Stock dividends do not result in a change in thepar value of the stock. On the other hand, stocksplits result in a pro rata reduction in the parvalue of the stock.

S f Eff t fS f Eff t f


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Small Stock

Dividend

Large Stock

DividendStock Splits

Total

Stockholders'

Equity

No Effect No Effect No Effect

Common Stock Increases Increases No Effect

Paid-in Capital Increases No Effect No Effect

Retained Earnings Decreases Decreases No Effect

Number of Share

Outstanding Increases Increases Increases

Par Value per

ShareNo Effect No Effect Decreases

Summary of Effects ofSummary of Effects ofStock Dividends and StockStock Dividends and Stock

SplitsSplits


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Adjust retained

earnings

retroactively.

The adjustment

should be

disclosed net of

any taxes.

The correction of an error identified as

affecting net income in a prior period.

Prior Period AdjustmentsPrior Period Adjustments


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End of Chapter 12End of Chapter 12

Financial&managerial accounting_15e williamshakabettner chap 12

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