Chapter 12,Income and Changes in Retained Earnings,Reporting the Results of Operations,This tax expense does not include effects of unusual, nonrecurring items.,These unusual, nonrecurring items are each reported net of taxes.,Discontinued Operations,Income/Loss from operating the segment prior to disposal.,Discontinued Operations,Income/Loss on disposal of the segment.,When management enters into a formal plan to sell or discontinue a segment of the business.,Discontinued Operations,When management enters into a formal plan to sell or discontinue a segment of the business.,A segment must be a separate line of business activity or an operation that services a distinct category of customers.,During 2000, Apex Co. sold an unprofitable segment of the company. The segment had a net loss from operations during the period of $150,000 and its assets sold at a loss of $100,000. Apex reported income from continuing operations of $350,000. All items are taxed at 30%. How will this appear on the income statement?,Discontinued Operations Example,Discontinued Operations Example,Income Statement Presentation:,Discontinued Operations Example,Material in amount. Gains or losses that are both unusual in nature and not expected to recur in the foreseeable future. Reported net of related taxes.,Extraordinary Items,During 2000, Apex Co. experienced a loss of $75,000 due to an earthquake at one of its manufacturing plants in Nashville. This was considered an extraordinary item. The company reported income before extraordinary item of $175,000. All gains and losses are subject to a 30% tax rate. How would this item appear on the 2000 income statement?,Extraordinary Items Example,Extraordinary Items Example,Income Statement Presentation:,Extraordinary Items Example,Accounting Changes,Change in Accounting Principle,Occurs when changing from one GAAP method to another GAAP method. Make a catch-up adjustment known as the cumulative effect of a change in accounting principle. The cumulative effect is reported net of taxes and after extraordinary items.,Change in Accounting Principle Example,Also in 2000, Apex Co. decided to change from the double-declining balance to the straight-line method for depreciation. The effect of this change is an increase in net income of $65,000. Apex reported income before cumulative effect of an accounting change of $122,500 during the year. All items of income are subject to a 30% tax rate. How would this item appear on the income statement?,Change in Accounting Principle Example,Computation:,Computation:,Income Statement Presentation:,Change in Accounting Principle Example,Change in Estimates,Revision of a previous accounting estimate. The new estimate should be used in the current and future periods. The prior accounting results should not be disturbed.,Change in EstimatesExample,On January 1, 1997, we purchased equipment costing $30,000, with a useful life of 10 years and no salvage value. During 2000, we determine that the remaining useful is 5 years (8-year total life). We use straight-line depreciation. Compute the revised depreciation expense for 2000.,Record depreciation expense of $4,200 for 2000 and subsequent years.,Change in EstimatesExample,Lets move on to a few final topics.,Price-earnings Ratio (P/E),Often, the Price-Earnings Ratio is used to evaluate the reasonableness of a company抯 stock price.,Lets examine this further.,Earnings Per Share (EPS),A measure of the company抯 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) -Partial Income Statement,Use the information from Apex Co. that was generated earlier. Assume that Apex has weighted average shares outstanding of 156,250. Prepare a partial income statement showing the EPS for Income from Operations and for the other special items.,Earnings Per Share (EPS) -Partial Income Statement,* Rounding error.,Earnings Per Share (EPS),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.,Accounting for Cash Dividends,Declared by board of directors.,Not legally required.,Creates liability at declaration.,Requires sufficient Retained Earnings and Cash.,Dividend Dates,Date of Declaration Board of directors declares the dividend. Record a liability.,Dividend Dates,Ex-Dividend Date The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend.,Dividend Dates,X,Date of Record Stockholders holding shares on this date will receive the dividend. (No entry),Date of Payment Record the payment of the dividend to stockholders.,Dividend Dates,Dividend DatesQuestion,On June 1, 1999 a corporations board of directors declared a dividend for the 2,500 shares of its $100 par value, 8% preferred stock. The dividend will be paid on July 15. Which of the following will be included in the July 15 e