Acct Ii - Chapter 15 Lecture Notes

Chapter 15 – Corporations, Dividends, Retained Earnings & Income Reporting

EARNINGS PER SHARE (EPS) (1) Used by investors to evaluate past performance and projections on corporate earnings. (2) EPS = (Net Income – Preferred Dividends) / (Common Shares Outstanding) Note: This formula assumes that the shares of outstanding stock have not changed during the year. (3) If stock was issued during the year then you must compute the weighted average number of common shares outstanding during the year. STOCK DIVIDENDS (1) A distribution of additional stock without receiving any consideration from the stockholder (2) If cash is needed for capital expansion stock dividends are issued rather than cash dividends (3) Give a return to the stockholders indicating that the company is doing well (4) The par value of the stock is unchanged (5) Possible to see a decline in market price (6) There is a dilution (reduction) of EPS and book value (7) Total stockholders equity remains the same (8) There is a reduction of retained earnings and an increase in the contributed capital stock account. This is referred to as capitalizing retained earning. (9) (a) Small Stock Dividend – If the stock issued is 25% or less of the total shares outstanding, it is considered a small stock dividend. -

Capitalize retained earnings using FMV (fair market value) of the stock to be distributed.

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(b) Large Stock Dividend – Stock issued that is > 25% of the total shares outstanding, it is considered a large stock dividend. -Capitalize retained earnings for the par or stated value of the stock (10)The percentage of equity owned by the stockholders remains unchanged (11)Entry to record stock dividend declared (Less than 25% of total shares o/s) Stock Dividends Stock dividends distributable Paid-in-capital in excess of par

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Entry to issue the stock dividends Stock Dividends Distributable Common Stock

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INCOME STATEMENT

(1) Statement of Profitability (2) Revenue > Expense = Net Income (3) Revenue < Expense = Net Loss (4) Can be presented in two formats: (a) Single step presentation does not detail components of the income statement. (b) Multiple step presentation presents various computations and classifications within the body of the income statement.

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Examples:

- Gross sales - Net sales - Gross profit (Net Sales – COGS) - Income from continuing operations or EBIT (Earnings Before Interest + Taxes)

Note: The interest and taxes are deemed to be out of management’s control. -Other income/(Expenses) Interest income is deemed to be a passive activity Gain of loss on disposal of fixed assets The purpose is to separate continuing from non-continuing or unusual items.

CLASSIFICATIONS OF UNUSUAL ITEMS

(1) Results of “Discontinued” Operations – Operations of a business segment that has been sold, spun off, or disposed of or is the subject of the formal plan for disposal.

Business Segment (Division, product line, sales office)

(2) Extraordinary Items – Are unusual in nature and infrequently occur (3) Change in Accounting Principle – Change from one GAAP to another

The change should be disclosed in the footnotes and on the face of the financial statements in the year of the change (state the nature and justification of the change). All of the above should be disclosed with their tax impact and their impact on EPS

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(4) So as not to mislead the financial statements EPS amounts should be stated for the following: (a) Income from continuing operations (b) Income before extraordinary items and cumulative effect in an accounting principle. (c) Extraordinary items (d) Change in accounting principle (e) Net Income

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