Financial Accounting

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Chapter 16Corporate Reporting
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Income Statement

• NOTE This chapter is reviewed somewhat in
  reverse compared to the text
• Weve seen the income statement before.
• Whats new here is that the income statement is
  not only used to report net income from
  continuous operations, but also for discontinued
  operations and extraordinary items
• Discontinued Operations Operations that cease
  to operate, at least as far as this business is
  concerned. Resulting from
• Sale
• Disposal, or shut down

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Income Statement

• Extraordinary Items
• These are events resulting in income or loss.
  They have 3 inclusive characteristics
• Not expected to occur frequently over several
  years
• Not part of normal business activity for this
  business
• Does not depend on management decision making
• Look at Exhibit 16.13. Notice that
• The top section is income from continuing
  operations
• Mid section is discontinued operations
• Bottom section is Extraordinary items
• The lowest section is Earnings Per Share

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Additional Share Transactions

• Companies can be very creative with all the stuff
  that they can do with respect to share
  transactions.
• Not only can they sell shares, but they can
• Issue a share dividend
• Split shares
• Repurchase shares

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Share Dividend

• Dividends can be issued by paying a Share
  Dividend
• This is the issue of more shares to shareholders
  which they can either keep or sell in the open
  market
• Issuing a cash dividend reduces cash and
  shareholder equity
• Issuing a share dividend does neither of these
  but can dilute individual shareholders ownership
  and reduce the market stock price of the shares

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Share Splits

• Share Splits is the distribution of more shares
  to shareholders according to their current
  percentage of ownership.
• Splits do not have to be a 2 for 1, but for
  almost any ratio (3 for 2, 5 for 4, etc)
• There are no journal entries for share splits as
  they do not affect the equity accounts
• A share split will increase the number of shares
  in the market but correspondingly reduce the
  value of those shares so that the total company
  market capitalization remains the same
• Market capitalization Total Shares Outstanding
  x Price per share

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Repurchase of Shares

• Companies may repurchase their shares on the open
  market
• When repurchasing shares, the shares must be
  retired. A company cannot trade in its own
  shares
• Corporations buy back their own shares to
• Avoid a hostile take over
• To reduce shares in the market there by
  increasing share value

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Earnings Per Share

• Earnings Per Share (EPS) is the amount of income
  earned by each share of a company's outstanding
  common shares
• EPS (Net Income Preferred Dividends)/Weighted
  Avg No. of Common Shares
• The top portion denotes the amount of cash after
  ALL expenses (dividends are not an expense,
  but) accruing to the common shareholders (the
  true owners of the business)

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Earnings Per Share

• The Weighted Average No. of Common Shares is used
  because there could be events during the year
  that change the quantity that are outstanding
• Issuing more shares
• Issuing share dividends
• Share splits
• Retirement (repurchase) of shares
• A company may also choose to show an EPS figure
  based on the total quantity of shares that could
  be outstanding
• This means the company calculates a theoretical
  total number of shares that could be sold,
  converted, exercised from options etc, then
  calculates a Fully Diluted EPS