Chapter 11
1 / 33

Chapter 11 - PowerPoint PPT Presentation

  • Updated On :

Chapter 11. The Income Statement & The Statement of Stockholders’ Equity. Learning Objectives. Analyze a complex income statement Account for a corporation’s income tax Analyze a statement of stockholders’ equity

I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
Download Presentation

PowerPoint Slideshow about 'Chapter 11' - aulii

An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
Chapter 11 l.jpg

Chapter 11

The Income Statement & The Statement of Stockholders’ Equity

Learning objectives l.jpg
Learning Objectives

  • Analyze a complex income statement

  • Account for a corporation’s income tax

  • Analyze a statement of stockholders’ equity

  • Understand managers’ and auditors’ responsibilities for the financial statements

Income statement l.jpg
Income Statement

  • Periodically Prepared to report Financial Consequences of Activities Undertaken

    • By Accounting Entity

    • Within a Certain Period of Time

  • Profit

    • More resources available at end-of-period then beginning-of-period

  • Loss

    • Consumed more resources by the end-of-period then it generated

Income statement4 l.jpg

Summary of Revenues and Expenses

For a Specific Period of Time

Grouped by Class


Returns and Allowances


Cost of Goods Sold

Gross Margin/Profit

Operating Expenses

Selling Expenses










Legal & Professional


Depreciation – Bldg & Equip


Net Income from Operations


Interest Expense

Interest Income

Discontinued Operations

Extraordinary Events

Cumulative Effect of Change

Net Income

Earnings Per Share

Income Statement

Accounting principles l.jpg
Accounting Principles

  • Matching

  • Revenue Realization

Income statement continuing operations l.jpg

Allied Electronics Corporation

Income Statement

Year Ended December 31, 20x5

Sales revenue $500,000

Cost of goods sold –240,000

Gross margin $260,000

Operating expenses 181,000

Operating income $ 79,000

Income Statement - Continuing Operations

Income statement continuing operations7 l.jpg
Income Statement - Continuing Operations

Operating income $79,000

Other gains (losses):

Loss on restructuring operations ( 8,000)

Gain on sale of machinery 19,000

Income from continuing operations

before income tax $90,000

Income tax expense 36,000

Income from continuing operations $54,000

Income statement special items l.jpg
Income Statement - Special Items

Discontinued operations: $35,000,

less income tax of $14,000 21,000

Income before extraordinary items

and cumulative effect of change

in depreciation method $75,000

Extraordinaryflood loss, $20,000,

less income tax savings of $8,000 (12,000)

Cumulative effect of change in

depreciation method, $10,000,

less income tax of $4,000 6,000

Net income $69,000

Income from continuing operations l.jpg
Income from Continuing Operations

  • A measure of the part of the business expected to be ongoing.

  • Used to predict future income.

Predicting future profits l.jpg
Predicting Future Profits

Estimated annual

income in the future

Estimated value of

Common Stock



capitalization rate

Continuing operations l.jpg
Continuing Operations

  • The company restructured operations at a loss of $8,000.

  • Report as “Other” item – part of continuing operations, but falls outside of main business endeavor

Other income statement items l.jpg
Other Income Statement Items

  • Discontinued Operations

  • Extraordinary Gains and Losses (Extraordinary Items)

    • Must be both infrequent

      • seldom happening or occurring

    • and Unusual

      • not ordinarily encountered

  • Cumulative Effect of a Change in Accounting Method

Discontinued operations l.jpg
Discontinued Operations

  • Segment – identifiable division of a company

    • Sold or

    • Closed

Extraordinary items l.jpg
Extraordinary Items

  • Unusual for the company and infrequent

    • Losses due to natural disasters

    • Expropriations

      • the action of the state in taking or modifying the property rights of an individual in the exercise of its sovereignty

  • An Exception

    • Material gains/losses from extinguishment of debt (to be reported as extraordinary item)

Cumulative effect of a change in accounting principle l.jpg
Cumulative Effect of a Change in Accounting Principle

  • From double-declining-balance (DBB) to straight-line depreciation

  • From first-in, first-out (FIFO) to weighted-average cost for inventory

  • Report in a special section of the income statement after extraordinary items

Earnings per share l.jpg
Earnings Per Share

Net Income


Preferred dividends

Earnings per share


  • Earnings per share is disclosed separately for:

    • continuing operations

    • discontinued operations (do not subtract pfd)

    • Extraordinary items (don not subtract pfd)

    • Cumulative effect of change in accounting method (do not subtract pfd)

Average number of shares of common outstanding

Income statement earnings per share l.jpg
Income Statement - Earnings per Share

Earnings per share of common stock

(20,000 shares outstanding):

Income from continuous operations

(54000)/20000 $2.70

Income from discontinued operations

(21000/20000) 1.05

Income before extraordinary item

and cumulative effect of change

in depreciation method

(75000/20000) $3.75

Extraordinary loss

(12000/20000) (0.60)

Cumulative effect of change in

depreciation method

(6000/20000) 0.30

Net income

(69000/20000) $3.45

Earnings per share19 l.jpg
Earnings Per Share

  • Effect of preferred stock

    • preferred dividends must be paid before distributions of earnings to common stockholders.

  • Dilution

    • Convertible items could result in diluted eps.

    • Diluted EPS is disclosed on the income statement.

Comprehensive income l.jpg
Comprehensive Income

  • Change in total stockholders’ equity from all sources other than from the owners of the business.

    • Unrealized gains (losses) on available-for-sale investments

    • Foreign-currency translation adjustments

Corporate income taxes l.jpg

Income before income tax (from the

income statement)





Tax Rate



Taxable income from the income tax return

filed with the IRS





Tax Rate



Corporate Income Taxes

  • Must measure

    • Income tax expense

    • Income tax payable

Corporate income taxes22 l.jpg
Corporate Income Taxes

  • Difference between income tax expense and income tax payable is a deferred tax liability or deferred tax asset.

Accounting for corporate income taxes l.jpg
Accounting for CorporateIncome Taxes

  • Suppose for 20x5, Nike, Inc., has pretax accounting income of $900 million on the income statement.

  • Taxable income is $800 million on the company’s income tax return.

  • The tax rate is 40%.

Accounting for corporate income taxes24 l.jpg
Accounting for CorporateIncome Taxes

Dec 31Income Tax Expense ($900 x .40) 360

Income Tax Payable ($800 x .40) 320

Deferred Tax Liability 40

Recorded income tax for the year

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Accounting for corporate income taxes25 l.jpg
Accounting for CorporateIncome Taxes

Income statement

Income before income tax $900

Income tax expense 360

Net income $540

Balance sheet

Current Liabilities:

Income tax payable $320

Long-term liabilities:

Deferred tax liability 40*

Total $360

*Assumes beginning tax liability was zero.

Retained earnings l.jpg
Retained Earnings

  • Prior period adjustments

    • corrections of errors that occurred in prior periods.

  • Since the temporary accounts have been closed to retained earnings, errors from prior periods must be made to retained earnings.

Reporting a prior period adjustment l.jpg

CNN Corporation

Statement of Retained Earnings

Year Ended December 31, 2005

Retained Earnings, Dec. 31, 2004 (original) $390,000

Prior-period adjustment – debit to correct error

in recording income tax expense of 2004 ( 10,000)

Retained earnings, Dec. 31, 2004, adjusted $380,000

Net income for 2005 114,000

Total $494,000

Deduct: Dividends for 2005 ( 41,000)

Retained earnings balance, Dec. 31, 2005 $453,000

Reporting a Prior-Period Adjustment

©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren

Restrictions on retained earnings l.jpg
Restrictions on Retained Earnings

  • Dividends and purchases of treasury stock require payments by the corporation to its stockholders

  • Creditors may restrict a corporation’s dividend payments and treasury stock purchases

  • Companies report any retained earnings restrictions in notes to the financial statements

Statement of stockholders equity l.jpg
Statement of Stockholders’ Equity

  • Reports all changes in equity for the period.

  • Issuance of stock

  • Net income

  • Cash dividends

  • Stock dividends

  • Treasury stock transactions

  • Accumulated other comprehensive income

Responsibility for the financial statements l.jpg
Responsibility for theFinancial Statements

  • Management

    • issues a statement of responsibility with financial statements

    • declares responsibility for financial statements and states that they conform to GAAP

Auditor report l.jpg
Auditor Report

Typically contains three paragraphs:

  • Identifies the audited financial statements

  • Describes how the audit was performed

  • States the auditor’s opinion -financial statements conform to GAAP and people can rely on them for decision making

Auditor report33 l.jpg
Auditor Report

  • Unqualified (Clean)

    • the financial statements presented are free of material misstatements and are in accordance with GAAP

  • Qualified

    • the financial statements are fairly presented with a certain exception which is otherwise misstated

  • Adverse

    • the information contained is materially incorrect, unreliable, and inaccurate in order to assess the auditee’s financial position and results of operations

  • Disclaimer

    • the auditor could not form, and consequently refuses to present, an opinion on the financial statements