Copyright © 2012 The McGraw-Hill Companies, Inc.

PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin

Income and Changes in Income and Changes in Retained EarningsRetained EarningsChapter 12

12-2

Information about net income can be divided into two major categories

Income from continuing operations.

Reporting the Results of Reporting the Results of OperationsOperations

12-3

This tax expense does not include effects of unusual, nonrecurring items.

These unusual, nonrecurring items are each reported net of taxes.

12-4

When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed on the

income statement.

Discontinued OperationsDiscontinued Operations

Discontinued Operations

12-5

A segment must be a separate line of business activity or an

operation that services a distinct category of customers.

Discontinued OperationsDiscontinued Operations

When management enters into a formal plan to sell or discontinue a segment of the business, the related gains and losses must be disclosed

on the income statement.

12-6

Extraordinary ItemsExtraordinary Items•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.

12-7

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.

Earnings Per Share (EPS)Earnings Per Share (EPS)

12-8

Declared by Board of Directors.

Not legally required.

Creates liability at declaration.

Requires sufficient Retained Earnings

and Cash.

Cash DividendsCash Dividends

12-9

Dividend DatesDividend DatesDate of Declaration

•Board of Directors declares the dividend.•Record a liability.

On March 1, 2011, the Board of Directors of Matrix, Inc. declares a $1.00 per share cash dividend on its

500,000 common shares outstanding. The dividend is payable to stockholders of record on April 1, and

paid on May 1.

12-10

Dividend DatesDividend DatesEx-Dividend Date

•The day which serves as the ownership cut-off point for the receipt of the most recently declared dividend.

NO ENTRY

12-11

Date of Record•Stockholders holding shares on

this date will receive the dividend. (No entry)

Dividend DatesDividend Dates

XApril 2011

12-12

Date of Payment•Record the payment of the

dividend to stockholders.

Dividend DatesDividend Dates

12-13

All stockholders retain same percentage

ownership.

No change in total stockholders’ equity.

No change in par values.

Stock DividendsStock DividendsDistribution of additional shares of

stock to stockholders.

12-14

Reasons for Stock Reasons for Stock DividendsDividendsManagement often finds stock

dividends appealing because they allow management to distribute something of perceived value to

stockholders while conserving cash which may be needed for other

purposes.Stockholders like stock dividends

because they receive more shares, often the stock price does not fall

proportionately, and the dividend is not subject to income taxes (until the

shares received are sold).

12-15

Small Stock Dividend

Large Stock Dividend Stock Splits

Total Stockholders'

EquityNo Effect No Effect No Effect

Common Stock Increases Increases No EffectPaid-in Capital Increases No Effect No Effect

Retained Earnings Decreases Decreases No Effect

Number of Shares Outstanding Increases Increases Increases

Par Value per Share No Effect No Effect Decreases

Summary of Effects of Summary of Effects of Stock Dividends and Stock Stock Dividends and Stock SplitsSplits

12-16

Adjust retained earnings

retroactively.

The adjustment should be

disclosed net of any taxes.

The correction of an error identified as affecting net income in a prior period.

Prior Period AdjustmentsPrior Period Adjustments

12-17

End of Chapter 12End of Chapter 12