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Hhtfa8e ch11 stud devry Accounting 212 FINANCIAL ACCOUNTING
- 3. The Income Statement &
Statement of Stockholders’
Equity
Chapter 11
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- 4. Analyze a corporate income statement
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- 5. Earnings Quality
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- 7. Cost of Goods Sold and Gross Profit
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- 8. 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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- 9. Operating Earnings
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- 10. Value of Corporate Stock
Estimated Estimated future annual income
value of
common
stock Investment capitalization rate
Number of Current
Current
common market
market value
shares price per
of company
outstanding share
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- 11. Investment Decision Rule
If the estimated value Decision
of the company
Buy the stock because the
Exceeds price may go up
Current
market value Hold the stock because
Equals of the the price will hold steady
company Sell the stock because the
Is less than price may go down
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- 12. 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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- 13. Accounting Changes
Change in estimates Change in principles
• Examples: • Example:
▫ Estimated life of plant ▫ Change in inventory
asset method (FIFO to LIFO)
▫ Percent uncollectible of
receivables
• Report new amounts for • Report retrospectively
current and future ▫ Prior period amounts
periods are restated
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13
- 14. Earnings per Share (EPS)
Net income minus Preferred Dividends
Average # of Common Shares Outstanding
Key measure of
business
success
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- 15. Exercise 11-16A
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
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- 16. Exercise 11-16A
Net Income minus Preferred Dividends
Earnings
per share
Average # of Common Shares Outstanding
?
?
?
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- 17. Account for a corporation’s income tax
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- 18. Corporate Income Taxes
Income tax Income Income tax
expense before taxes rate
Income Statement From the Income
account Statement
Income tax Taxable Income tax
payable income rate
Balance sheet From the tax
account return
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- 19. Exercise 11-18A
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
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- 20. Exercise 11-18A
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)
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- 21. Correcting Retained Earnings
• Prior period adjustments
▫ Revenue or expense recorded incorrectly in an
earlier period
▫ Correction of error adjusts beginning balance of
retained earnings
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- 22. 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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- 23. Analyze a statement of stockholders’ equity
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- 24. Statement of Stockholders’ Equity
• Column for each element of equity
Accumulated other
Common Additional Retained comprehensive Treasury
stock paid-in capital earnings income stock
• Row for each transaction that affected equity
Beginning balance
+ Net earnings
+ or – Accumulated other comprehensive income
+ Issuance of stock
- Repurchase of stock
- Dividends
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- 25. Understand managers’ and auditors’
responsibilities for the financial statements
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- 26. 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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- 27. 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
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