Kế toán tài chính 2 - Chapter 15: The corporate income statement and the statement of stockholders’ equity

The Corporate Income Statement and the Statement of Stockholders’ EquityMultimedia Slides by: Gail A. Mestas, MAcc, New Mexico State UniversityChapter 15Learning ObjectivesPrepare a corporate income statement and identify the issues related to evaluating the quality of earnings.Show the relationships among income taxes expense, deferred income taxes, and net of taxes.Describe the disclosure on the income statement of discontinued operations, extraordinary items, and accounting changes.2Copyright © Houghton Mifflin Company. All rights reserved.Learning Objectives (cont’d)Compute earnings per share.Prepare a statement of stockholders’ equity.Account for stock dividends and stock splits.Calculate book value per share.3Copyright © Houghton Mifflin Company. All rights reserved.Performance Measurement: Quality of Earnings IssuesObjective 1Prepare a corporate income statement and identify the issues related to evaluating the quality of earnings4Copyright © Houghton Mifflin Company. All rights reserved.Comprehensive Income is the change in a company’s equity from sources other than owners during a periodIncludesNet incomeChanges in unrealized gains and lossesOther items affecting equityFASB has taken position that income for a period should be all-inclusive, comprehensive incomeMay be reported on income statement or separate statement, but usually reported on statement of stockholders’ equity5Copyright © Houghton Mifflin Company. All rights reserved.The Corporate Income Statement shows how a company’s net income is derivedIncludes allRevenuesExpensesGains and losses (except from prior period adjustments)6Copyright © Houghton Mifflin Company. All rights reserved.Sections of the Corporate Income StatementIncome from continuing operationsA company may have both continuing and discontinued operationsAffected by choices of accounting methods and estimatesMay contain gains and losses, write-downs, and restructuringsIncome tax expenseDiscontinued operationsExtraordinary gains and lossesEffects of accounting changesEarnings per shareNonoperating items7Copyright © Houghton Mifflin Company. All rights reserved.Corporate Income StatementQuality of Earnings refers to the substance of earnings and their sustainability into future accounting periodsBecause of the importance of net income (bottom line), there is significant interest in evaluating the quality of earningsAffected by Accounting methods and estimatesGains and lossesWrite-downs and restructuringsNature of nonoperating items reported on the income statement9Copyright © Houghton Mifflin Company. All rights reserved.Choice of Accounting Methods and EstimatesAffect a firm’s operating incomeBoth current and future operating incomeManagement and other financial statement users must be aware of the impact of accounting estimates on reported operating incomeDue to the considerable latitude in the choice of estimatesThe relative importance of each estimate depends on the industry in which the firm operates10Copyright © Houghton Mifflin Company. All rights reserved.Accounting EstimatesPercentage of uncollectible accounts receivableSales returnsUseful life of an assetResidual or salvage value of an assetTotal units of productionTotal recoverable units of natural resourceAmortization periodExpected warranty claimsExpected environmental cleanup costs11Copyright © Houghton Mifflin Company. All rights reserved.Generally Accepted Accounting MethodsUncollectible receivable methodsPercentage of net sales or aging to estimate uncollectible accounts receivableInventory methodsLIFO, FIFO, or average cost to value inventoryDepreciation methodsAccelerated, production, or straight-line depreciationRevenue recognition methodsGenerally accepted accounting methods are designed to match revenues and expenses12Copyright © Houghton Mifflin Company. All rights reserved.Effect of Accounting Methods and EstimatesSome methods and estimates are more conservative than othersThe existence of alternatives could cause problems in the interpretation of financial statements Conventions that help overcome this problem Full disclosureRequires that management explain the significant accounting policies used in preparing the financial statements in a note to the financial statementsConsistencyRequires that the same accounting procedures be followed from year to year13Copyright © Houghton Mifflin Company. All rights reserved.Gains and Losses result from the sale or disposal of operating assets or marketable securitiesAre one-time events but appear in the operating section of the income statement14Copyright © Houghton Mifflin Company. All rights reserved.Write-Downs and RestructuringsWrite-downThe recording of a decrease in the value of an asset below the carrying value on the balance sheet, andThe reduction of income in the current period by the amount of the decreaseAlso called a write-offRestructuringThe estimated cost associated with a change in a company’s operationsUsually involving the closing of facilities and laying off of personnel15Copyright © Houghton Mifflin Company. All rights reserved.Write-Downs and Restructurings (cont’d)Reduce current operating incomeBoost future income by shifting future costs to the current periodAre often an indication of bad management decisionsPaying too much for the assets of another companyMaking operational changes that do not work out“Big bath”Taking all possible losses in current year so that future years will be “clean” of these costsOften occur when A company is having a bad year A change of management takes placeSo improved results can be shown in future years16Copyright © Houghton Mifflin Company. All rights reserved.Nature of Nonoperating ItemsWhen analyzing financial statements, look beyond a “bottom line” that may have been influenced by nonoperating items that are not expected to recurDiscontinued operationsExtraordinary gains and lossesEffects of accounting changes17Copyright © Houghton Mifflin Company. All rights reserved.Effect of Quality of Earnings on Cash Flows and Performance MeasuresItems included in income that do not have an effect on cash flows and performance measures (except for possible income tax effects)Gains and lossesWrite-downs and restructuringsNonoperating itemsCash expenditures for these items made previouslyTherefore, the focus of analysis is on sustainable earningsWhich generally have a relationship to future cash flows18Copyright © Houghton Mifflin Company. All rights reserved.When the company has a complex income statement, items affecting net income other than continuing operations must be consideredWrite-downs and restructurings reduce assets and stockholders’ equity, which tend to improve these ratios in current and future yearsEffect of Quality of Earnings on Cash Flows and Performance Measures (cont’d)Management’s performance and compensation are often linked to return on assets or return on equityMust understand the nature of both the numerator and denominator of both measuresNumerator for both is net income19Copyright © Houghton Mifflin Company. All rights reserved.DiscussionHow does net income differ from comprehensive income?Net income is a component of comprehensive income. Comprehensive income includes net income, changes in unrealized investment gains and losses, and other items affecting equity20Copyright © Houghton Mifflin Company. All rights reserved.Income Taxes ExpenseObjective 2Show the relationships among income taxes expense, deferred income taxes, and net of taxes21Copyright © Houghton Mifflin Company. All rights reserved.Income Taxes Expense is the expense recognized in the accounting records on an accrual basis that applies to income from continuing operationsThe amount payable is determined from taxable income, measured according to the rules and regulations of the income tax codeFor convenience, many small companies maintain their accounting records on a tax basisThe purpose of accounting is to determine net income in accordance with GAAP, not taxable income and tax liability22Copyright © Houghton Mifflin Company. All rights reserved.Income Taxes Expense (cont’d)Management has an incentive to use accounting methods that minimize the firm’s tax liabilityThere can be a material difference between accounting income and taxable incomeResults from differences in the timing of the recognition of revenues and expenses between GAAP and income tax accounting23Copyright © Houghton Mifflin Company. All rights reserved.Deferred Income Taxes represents the amount by which income taxes expense differs from income taxes payableIncome tax allocationA technique used to account for the difference between income taxes expense based on accounting income and the actual income taxes payable based on taxable income24Copyright © Houghton Mifflin Company. All rights reserved.Junction Corporation shows income tax expense of $144,500 on its income statement, but has actual income taxes payable of $92,000Record the estimated income taxes expense applicable to income from continuing operations using the income tax allocation procedureExample of Deferred Income Taxes25Copyright © Houghton Mifflin Company. All rights reserved.Deferred Income Taxes are recognized for the estimated future tax effects resulting from temporary differences in the valuation of assets, liabilities, equity, revenues, expenses, gains, and losses for tax and financial reporting purposesTemporary differencesThe recognition point for revenues, expenses, gains and losses is not the same for tax and financial reporting26Copyright © Houghton Mifflin Company. All rights reserved.Example of Temporary DifferencesTreatment of advance payment for goods Financial incomeRevenue is not recognized until goods are shippedTaxable incomeRevenue is recognized when cash is receivedResultTaxes paid > Tax expenseCreates a deferred income tax asset (prepaid taxes)27Copyright © Houghton Mifflin Company. All rights reserved.Classification of Deferred Income TaxesDepends on the classification of the related asset or liability that created the temporary differenceCurrentNoncurrentIf temporary difference not related to an asset or liabilityClassified as current or noncurrent based on expected date of reversal28Copyright © Houghton Mifflin Company. All rights reserved.Net of Taxes means that the effect of applicable taxes (usually income taxes) has been considered in determining the overall effect of an item on the financial statementsPhrase is used when a company has items that must be disclosed in a separate sectionEach such item should be reported net of the applicable taxesThe same procedure is used regardless of whether the separate item results in a gain or loss29Copyright © Houghton Mifflin Company. All rights reserved.Net of TaxesThe corporate income statement lists operating income before income taxes and the related income taxes expenseNonoperating items disclosed in a separate section are listed net of taxes to avoid distorting income taxes expense associated with ongoing operations 30Copyright © Houghton Mifflin Company. All rights reserved.Discussion“Accounting income should be geared to the concept of taxable income because the public understands that concept.” Comment on this statement, and tell why income tax allocation is necessaryAccounting income and taxable income should not be treated the same because they serve different purposesThe purpose of accounting income is to give some indication (however imperfect) of the increase or decrease in the business’s well-beingThe sole purpose of taxable income is to provide a basis for the collection of government revenues from the taxpayer Income tax allocation is necessary because there are differences between accounting and taxable income caused by the timing of revenues and expenses31Copyright © Houghton Mifflin Company. All rights reserved.Nonoperating ItemsObjective 3Describe the disclosure on the income statement of discontinued operations, extraordinary items, and accounting changes32Copyright © Houghton Mifflin Company. All rights reserved.Nonoperating ItemsDiscontinued operationsExtraordinary itemsAccounting changes33Copyright © Houghton Mifflin Company. All rights reserved.Discontinued Operations are segments of a business that are no longer part of its ongoing operationsA segment may be a separate major line of business or a separate class of customerGAAP require that gains or losses from discontinued operations be reported separately on the income statement34Copyright © Houghton Mifflin Company. All rights reserved.Extraordinary Items are events or transactions that are distinguished by their unusual nature and by the infrequency of their occurrenceShould be reported separately from continuing operations on the income statement, net of taxesIncludeAn uninsured loss from flood, earthquake, fire, or theftGain or loss from the passage of a new lawTaking of property by a foreign governmentGain or loss from an early retirement of debt35Copyright © Houghton Mifflin Company. All rights reserved.Accounting ChangesAlthough a violation of the consistency principle, a company is allowed to make accounting changes if current procedures are incorrect or inappropriateJustification must existGAAP requires that changes be disclosed in the financial statements36Copyright © Houghton Mifflin Company. All rights reserved.Cumulative Effect of an Accounting ChangeThe effect that the new accounting principle would have had on net income in prior periods if it had been applied instead of the old principleAccounting changes are shown on the income statement Immediately after extraordinary itemsNet of taxesExplained in the notes to the financial statementsThe amount of the cumulative effect is equal to the difference between using the new accounting method less that of using the old method37Copyright © Houghton Mifflin Company. All rights reserved.Illustration of the Cumulative Effect of an Accounting ChangeIn the 5 years prior to 20x2, Junction Corporation had used the straight-line method to depreciate its machinery. In 20x3, the company retroactively changed to the double-declining-balance method of depreciationCompute the cumulative effect of the change in depreciation charges (net of taxes)Relevant information about the accounting change is shown in the notes to the financial statements38Copyright © Houghton Mifflin Company. All rights reserved.Illustration of the Cumulative Effect of an Accounting ChangeIn the 5 years prior to 20x2, Junction Corporation had used the straight-line method to depreciate its machinery. In 20x3, the company retroactively changed to the double-declining-balance method of depreciationCompute the cumulative effect of the change in depreciation charges (net of taxes)The amount of the cumulative effect is deducted in 20x3, in addition to the current year’s depreciation costs included in the $550,000 costs and expenses section of the income statement (see Exhibit 1)39Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhy should a gain or loss on discontinued operations be disclosed separately on the income statement?Because the usefulness of the income statement and the evaluation of the ongoing activities of the business are enhanced if results from continuing operations are reported separately from those of discontinued operations. Such disclosure allows for comparisons with past continuing operations and projections to future operations40Copyright © Houghton Mifflin Company. All rights reserved.Earnings per ShareObjective 4Compute earnings per share41Copyright © Houghton Mifflin Company. All rights reserved.Earnings per Share (EPS)Presented on the face of the income statementDisclosed just below the net incomeAn EPS amount is always shown forIncome from continuing operationsIncome before extraordinary itemsThe cumulative effect of accounting changesNet incomeGain or loss from discontinued operations or extraordinary items42Copyright © Houghton Mifflin Company. All rights reserved.EPS CalculationIf the number of common shares changed, or the company paid preferred stock dividends during the year, the weighted average must be calculatedIf a company has nonconvertible preferred stock, the dividend must be subtracted from net income before EPS for common stock is computed43Copyright © Houghton Mifflin Company. All rights reserved.Capital Structure is the sources and amounts of capital used for financing the capital assets of a businessSourcesLong-term debtPreferred and common stockRetained earningsTypes of capital structureSimple capital structureComplex capital structure44Copyright © Houghton Mifflin Company. All rights reserved.Simple Capital StructureCompany has no bonds, stocks, or stock options that can be converted into common stockUse basic EPS calculation45Copyright © Houghton Mifflin Company. All rights reserved.Complex Capital StructureIncludes exercisable stock options or convertible stocks and bondsThese are potentially dilutive securitiesHave the potential of diluting the EPS of common stockA stockholder’s proportionate share of ownership in a company could be reduced by conversion, which would increase the total shares outstandingReport two earnings per share figuresBasic earnings per shareDiluted earnings per share46Copyright © Houghton Mifflin Company. All rights reserved.Diluted Earnings per Share is calculated by adding all potentially dilutive securities to the denominator of the basic EPS calculationShows stockholders the maximum potential effect of dilution on their ownership position in the companyDifference between basic and diluted EPS can be significant47Copyright © Houghton Mifflin Company. All rights reserved.DiscussionExplain the difference between a simple capital structure and a complex capital structureA company has a simple capital structure when it has only common stock or nonconvertible preferred stock and no other securities that can be converted into common stock. A complex capital structure exists when there are additional securities that can be converted to common stock48Copyright © Houghton Mifflin Company. All rights reserved.The Statement of Stockholders’ EquityObjective 5Prepare a statement of stockholders’ equity49Copyright © Houghton Mifflin Company. All rights reserved.The Statement of Stockholders’ Equity summarizes the changes in the components of the stockholders’ equity section of the balance sheetAlso called the statement of changes in stockholders’ equityReveals much more about the year’s stockholders’ equity transactions than the statement of retained earnings50Copyright © Houghton Mifflin Company. All rights reserved.Statement of Stockholders’ Equity51Copyright © Houghton Mifflin Company. All rights reserved.Retained Earningsare the part of stockholders’ equity that represents claims to assets arising from the earnings of the businessEqual a company’s profits since the date of its inception, less any losses, dividends to stockholders, or transfers to contributed capitalAre not directly associated with a specific assetMean that assets generated by profitable operations have been kept in the business52Copyright © Houghton Mifflin Company. All rights reserved.Retained Earnings (cont’d)Account carries a normal credit balanceDoes not mean that cash or designated assets have been set asideA debit balance in Retained Earnings represents a deficitDividends and subsequent losses are greater than accumulated profitsShown as a deduction from contributed capital on the balance sheet53Copyright © Houghton Mifflin Company. All rights reserved.Stockholders’ Equity Section of a Balance Sheet54Copyright © Houghton Mifflin Company. All rights reserved.Restriction on Retained Earnings means that dividends can be declared only to the extent of unrestricted retained earningsReasons for restricting retained earningsA contractual agreementState lawVoluntary action by the board of directors55Copyright © Houghton Mifflin Company. All rights reserved.Restriction on Retained Earnings (cont’d)Does not change the total retained earnings or stockholders’ equity of the companySimply divides retained earnings into restricted and unrestrictedThe most common way to disclose restricted retained earnings is by reference to a note to the financial statements56Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the difference between the statement of stockholders’ equity and the stockholders’ equity section of the balance sheet?The statement of stockholders’ equityA financial statement that summarizes changes that occurred during the accounting period in components of the stockholders’ equity section of the balance sheet The stockholders’ equity section of the balance sheet Lists the items in contributed capital and retained earnings on the balance sheet date57Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock Dividends and Stock SplitsObjective 6Account for stock dividends and stock splits58Copyright © Houghton Mifflin Company. All rights reserved.Stock Dividend is a proportional distribution of shares of a corporation’s stock to its shareholdersRepresents no change in the firm’s assets and liabilitiesNo assets are distributed as when a cash dividend is paid59Copyright © Houghton Mifflin Company. All rights reserved.Reasons for Declaring a Stock DividendGive stockholders some evidence of the company’s success without paying a cash dividendReduce the stock’s market price by increasing the number of shares outstandingMake a nontaxable distribution to stockholdersIncrease the company’s permanent capital60Copyright © Houghton Mifflin Company. All rights reserved.Effects of a Stock DividendTransfer a dollar amount from retained earnings to the contributed capital section on the date of declarationAmount transferred is the fair market value (usually the market price) of the additional shares to be issued61Copyright © Houghton Mifflin Company. All rights reserved.Example of Stock DividendsCaprock Corporation has the following stockholders’ equity structure62Copyright © Houghton Mifflin Company. All rights reserved.Caprock Corporation declares a 10 percent stock dividend on February 24, distributable on March 31 to stockholders of record on March 15. The market price of the stock on February 24 is $20 per shareExample of Stock Dividends (cont’d)Date of Declaration63Copyright © Houghton Mifflin Company. All rights reserved.Caprock Corporation declares a 10 percent stock dividend on February 24, distributable on March 31 to stockholders of record on March 15. The market price of the stock on February 24 is $20 per shareExample of Stock Dividends (cont’d)Date of DistributionNo entry is required Recall that this date is used to determine stock owners who will receive dividendsDate of Record64Copyright © Houghton Mifflin Company. All rights reserved. Example of Stock Dividends (cont’d)If financial statements are prepared between the date of declaration and the date of distribution, Common Stock Distributable should be reported as part of contributed capital65Copyright © Houghton Mifflin Company. All rights reserved. The assets of a corporation are not reduced as they are with a cash dividendThe proportionate ownership in the corporation of any individual is the same before and after a stock dividendEffects of Stock Dividends on Contributed CapitalStockholders’ equity is the same before and after a stock dividend 66Copyright © Houghton Mifflin Company. All rights reserved.Accounting for Stock SplitsAll stock dividends have an effect on the market price of a company's stockLarge stock dividends have a material effectStock dividends greater than 20 to 25 percent Transferring the par or stated value of the stock on the date of declaration from retained earnings to contributed capital67Copyright © Houghton Mifflin Company. All rights reserved.Stock Splits occur when a corporation increases the number of shares of stock and reduces them to par or stated value proportionatelyPurposeTo lower stock’s market value per share and increase demand for the stock at this lower price68Copyright © Houghton Mifflin Company. All rights reserved.Stock Splits (cont’d)No journal entry is necessaryDocument by making a memorandum entry in the general journal After a stock splitEquity per share is cut in halfShareholders’ proportionate interest in the company remains the sameIf the number of split shares exceeds the number of authorized sharesBoard of directors must secure state and stockholders’ approval before additional shares can be issued69Copyright © Houghton Mifflin Company. All rights reserved.July 15: Caprock Corporation’s 30,000 shares of $5 par value common stock issued and outstanding were split 2 for 1Each stockholder’s proportionate interest in the company remains the same because each share of $5 par value stock was converted to 2 shares of $2.50 par value stockExample of a Stock Split70Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the difference between a stock dividend and a stock split?Stock dividendA distribution of shares to stockholders that involves a transfer from retained earnings to contributed capital Stock splitAn increase in the number of shares outstanding and a proportional decrease in par or stated valueHas no effect on the balances in the stockholders’ equity accounts71Copyright © Houghton Mifflin Company. All rights reserved.Book ValueObjective 7Calculate book value per share72Copyright © Houghton Mifflin Company. All rights reserved.Value is associated with shares of stock in several waysPar value or stated value Is set when stock is authorizedEstablished legal capital of the companyMarket valueThe price investors are willing to pay for a share of stock in the open marketBook valueStockholders’ equity of a company73Copyright © Houghton Mifflin Company. All rights reserved.Book Value of a company’s stock represents the total assets of the company less its liabilitiesIt is the company’s stockholders’ equityPut another way, it is the company’s net assetsBook value per shareRepresents the equity of the owner of one share of stock in the net assets of the corporation74Copyright © Houghton Mifflin Company. All rights reserved.Book Value per ShareWhen a company has only common shares outstanding Shares outstandingIncludes common stock distributableDoes not include treasury stock When a company has both common and preferred stockSubtract the call value of the preferred stock plus any dividends in arrears from total stockholders’ equityUse par value if call value is not specified 75Copyright © Houghton Mifflin Company. All rights reserved.Caprock Corporation has total stockholders’ equity of $1,030,000 and 29,000 shares outstanding after recording the purchase of treasury stockCompute the book value per share of Caprock’s common stockBook Value per ShareOnly common shares outstanding 76Copyright © Houghton Mifflin Company. All rights reserved.Tri-state Corporation has total stockholders’ equity of $2,014,400, which includes 3,000 shares outstanding of $100 par value, 8 percent convertible preferred stock, 41,800 shares issued and 41,300 shares outstanding of $10 par value common stock, and 500 shares treasury stock. No dividends are in arrears and the preferred stock is callable at $105No Dividends in ArrearsBook Value per Share (cont’d)Both common and preferred stock outstanding77Copyright © Houghton Mifflin Company. All rights reserved.Tri-state Corporation has total stockholders’ equity of $2,014,400, which includes 3,000 shares outstanding of $100 par value, 8 percent cumulative preferred stock, 41,800 shares issued and 41,300 shares outstanding of $10 par value common stock, and 500 shares treasury stock. One year dividends is in arrears and the preferred stock is callable at $105Dividends in ArrearsBook Value per Share (cont’d)Both common and preferred stock outstanding78Copyright © Houghton Mifflin Company. All rights reserved.DiscussionWhat is the significance of book value per share of stock?Book value per share represents the equity of one share of stock in the net assets (assets minus liabilities) of a corporation. It can apply to both common and preferred stock79Copyright © Houghton Mifflin Company. All rights reserved.Time for ReviewPrepare a corporate income statement and identify the issues related to evaluating the quality of earningsShow the relationships among income taxes expense, deferred income taxes, and net of taxesDescribe the disclosure on the income statement of discontinued operations, extraordinary items, and accounting changes80Copyright © Houghton Mifflin Company. All rights reserved. And FinallyCompute earnings per sharePrepare a statement of stockholders’ equityAccount for stock dividends and stock splitsCalculate book value per share81Copyright © Houghton Mifflin Company. All rights reserved.