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devry Accounting 212 FINANCIAL ACCOUNTING
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1Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 2
The Income Statement & Statement of Stockholders’ EquityChapter 11
3Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Analyze a corporate income statement
4Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Earnings Quality
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Revenue Recognition•Revenue is recognized when earned
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Cost of Goods Sold and Gross Profit
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Operating and Other Expenses
•Largest operating expenses include salaries, wages, utilities and supplies
•Interest expense represents charges for borrowed money
•Interest revenue represents return earned on invested money
•Income tax expense
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Operating Earnings
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Value of Corporate Stock
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Estimated value of common
stock
Estimated future annual income
Investment capitalization rate
Current market value of company
Number of common shares
outstanding
Current market
price per share
Investment Decision Rule
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 11
If the estimated value of the company
Decision
Exceeds
Current market
value of the company
Buy the stock because the price may go up
Equals
Hold the stock because the price will hold steady
Is less than
Sell the stock because the price may go down
Discontinued Operations
•Sale or closure of a business segment•Gain or loss reported net of income tax•Typically not considered by analysts in
making predictions
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Accounting ChangesChange in estimates Change in principles• Examples:
▫Estimated life of plant asset
▫Percent uncollectible of receivables
• Report new amounts for current and future periods
• Example:▫Change in inventory
method (FIFO to LIFO)
• Report retrospectively▫Prior period
amounts are restated
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Earnings per Share (EPS)
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Net income minus Preferred Dividends
Average # of Common Shares Outstanding
Key measure of business
success
Exercise 11-16A
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Preferred stock $60 par, 3%, 12,000 shares issued
Common stock, $0.75 par, 1,100,000 shares issued
Treasury stock, common, 90,000 shares at cost
Preferred Dividend = $720,000 x 3% ?
Common shares outstanding = shares issued less treasury
shares?
Exercise 11-16A
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Net Income minus Preferred Dividends
Average # of Common Shares Outstanding
Earnings per share
?
??
Account for a corporation’s income tax
17Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Corporate Income Taxes
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 18
Income tax
expense
Income before taxes
Income tax rate
From the Income
Statement
Income tax
payable
Taxable income
From the tax return
Income tax rate
Income Statement account
Balance sheet account
Exercise 11-18A
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 19
Quinn Advertising Inc.Income Statement (partial)
For year ending December 31, 2010
Income before income tax
Income tax expense (375,000 x 30%)
Net Income
Exercise 11-18A
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Quinn Advertising, Inc.Balance Sheet (partial)
December 31, 2010
Current liabilities:
Income tax payable (300,000 x 30%)
Long-term liabilities:
Deferred tax liability (112,500 – 90,000)
Correcting Retained Earnings
•Prior period adjustments▫Revenue or expense recorded incorrectly in
an earlier period▫Correction of error adjusts beginning
balance of retained earnings
21Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Comprehensive Income
•Change in total stockholders’ equity from all non-owner sources
•Net income plus:▫Unrealized gains (losses) on available-for-
sale investments▫Foreign-currency translation adjustments
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Analyze a statement of stockholders’ equity
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Statement of Stockholders’ Equity•Column for each element of equity
•Row for each transaction that affected equity
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Common stock
Additional paid-in capital
Retained
earnings
Accumulated other
comprehensive income
Treasury stock
Beginning balance
+ Net earnings
+ or – Accumulated other comprehensive income
+ Issuance of stock
- Repurchase of stock
- Dividends
Understand managers’ and auditors’ responsibilities for the financial statements
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Management’s Responsibility
•Issues report on and declares responsibility for internal control over financial reporting
•States it has conducted an assessment of internal controls based on developed frameworks
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Auditor’s Report
•CPAs examine financial statements of publicly-traded companies
•Auditors determine if statements comply with GAAP
•Combined report issued on the financial statements and system of internal controls
•Audit adds credibility to financial statements and internal control system
27Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
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