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CHAPTERS

CHAPTERS. 15 & 18. FINANCIAL REPORTING: Part 1: The Income Statement. Additional sections follow below operating income ; they are for reporting material items not typical of regular operations. These non-typical times include: Non Operating Revenues and Expenses Discontinued operations

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CHAPTERS

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  1. CHAPTERS 15 &18 FINANCIAL REPORTING: Part 1: The Income Statement

  2. Additional sections follow belowoperating income; they are for reporting material items not typical of regular operations. These non-typical times include: Non Operating Revenues and Expenses Discontinued operations Extraordinary items Each item should be carefully explained in notes to the financial statements, and the income statement should report the income tax expense or savings applicable to each item. INCOME STATEMENTSAdditional Sections

  3. Any item that does not have anything to do with the regular business activities of the business. Examples include: Minor “other” revenues Interest expense Gains and losses on the disposal of assets INCOME STATEMENTS1. Non Operating Revenues and Expenses

  4. Discontinued operationsrefers to the disposal of a significant segment of a business, such as the elimination of an entire activity or of a major class of customers. Income (loss) from discontinued operations consists of Income (loss) from operations, and Gain (loss) on disposal of the segment. INCOME STATEMENTS2. Discontinued Operations

  5. Extraordinary itemsare events and transactions that meet three conditions: Infrequent Non-typical Not subject to management decision INCOME STATEMENTS3. Extraordinary Items

  6. INCOME STATEMENTS Extraordinary vs. Non-Extraordinary Extraordinary Items 1. Effects of major casualties (acts of God) if rare in the area 2. Expropriation (takeover) of property by a government 3. Effects of a newly enacted law or regulation, such as a condemnation action Ordinary Items (But not Operating Items) 1. Effects of major casualties (acts of God) if frequent in the area 2. Write down of inventories or write off of receivables 3. Losses attributable to labour disputes 4. Gains or losses from sale of capital assets

  7. INCOME STATEMENTSPresentation – From Operating Income Onwards • Operating Income $504,850 Non – Operating Items Other Revenues and Gains $2,900 Interest Revenue 8,000 Gain on sale of Equipment Total non-operating revenues and gains 10,900 Other Expenses and Losses $(3,750) Interest Expense (5,000) Casualty Loss from Vandalism Total non-operating expenses and losses (8,750) Total Income before Taxes $507,000 (202,800) Less: Income Taxes (assume 40% tax rate) Income from Continuing Operations $304,200 Discontinued Operations • Income from real estate division, net of tax expense $5,000 –$2,000(40%) is… $3,000 • Loss from sale of real estate division, net of tax savings (30,000) $50,000 –$20,000(40%) is… • Income (Loss) on Discontinued Operations (27,000) Income before Extraordinary Items 277,200 Expropriation of Property,net of tax savings (60,000) – 24,000(40%) is… (36,000) Net Income 241,200

  8. INCOME STATEMENTSEarnings Per Share - Additional Disclosures HWA ENERGY, INC. Net income $301,000 Earnings per share $5.60 (2.10) 3.50 (.49) $3.01 Income from continuing operations Loss from discontinued operations Income before extraordinary item Extraordinary loss Net income When the income statement contains any non-typical item, EPS should be disclosed for each component.

  9. Prior Period Adjustments • Whenever a change in an accounting policy or procedure is made (e.g. FIFO to LIFO), the effects on Net Income (net of tax) for all prior years is charged directly to Capital. • Capital Account (for sole proprietorships) • Retained Earnings (for corporations)

  10. Prior Period Adjustments • A business with a 6 year old machine, and a 40% tax rate, changes it’s amortization method from straight line to declining balance. This produces $40,000 of additional expense up to Jan. 1 of this year. It is shown in the Equity section as follows Begin. Balance Jan. 1 as previously reported $124,000 Change in accounting policy net of $16,000 (24,000) in tax Retained Earnings Jan. 1 as adjusted $100,000 Add: Net Income $80,000 Less: Drawings/Dividends (20,000) Change in Equity for the year 60,000 Ending Balance, Dec. 31 $160,000

  11. Do Problems: P15-6A P15-7A, plus add the following: A change in accounting policy reduced a prior period’s net income by $166,000 before a tax savings of $40,000

  12. Earnings per share (EPS)indicates the net income earned by each common share. Companies report earnings per share on the income statement The formula to calculate earnings per share when there has been no change in shares during the year is as follows: EARNINGS PER SHARE Net Income – Preferred Dividends Number of Common Shares Earnings per Share 

  13. PRICE - EARNINGS RATIO Market price per share Earnings per share Price-Earnings Ratio  The price-earnings (P/E) ratio helps investors determine whether the shares are a good investment in relation to earnings. It is a per share calculation, calculated by dividing the market price of the shares by its earnings per share. A high P/E ratio can be one indicator that investors believe the company has future growth potential.

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