Corporate Income Statement / Statement of Stockholders' Equity

What is the difference between basic and diluted earnings per share?

Diluted differ from basic in that they take into account the effect of all potentially dilutive securities on earnings per share.

What is the difference between a stock dividend and a stock split?

A stock dividend is a proportional distribution of newly issued shares of stock to stockholders. A stock split divides the shares already owned by stockholders into additional shares according to a predetermined ratio. Both increase shares outstanding.

What is the effect of a stock dividend and a stock split on a corporation's capital structure?

A stock dividend results in a transfer of ownership interest from retained earnings to contributed capital. A stock split changes the number and par value of the common stock; it does not change the dollar amount in retained earnings or contributed capital.

What is the difference between a write-down and a restructuring, and where do these items appear on a corporate income statement?

A write-down is a reduction in value of an asset below its carrying value on the balance sheet. A restructuring is the estimated cost of a change in a company's operations; it usually involves the closing of facilities and layoff of personnel. Both reduce current operating income and boost future income by shifting future costs to the current accounting period. Both appear in the operating portion of a corporate income statement.

How does the accounting treatment of stock dividends differ from that of cash dividends?

Accounting for a cash dividend, dividends payable is credited, and in accounting for a stock dividend, common stock distributable and additional paid-in capital are credited for the amount of the stock dividend measured at market value.

How do cash flows relate to quality of earnings?

Because if earnings have underlying cash flows, they are considered more sustainable and of higher quality. So a company with low earnings and high cash flows has higher quality earnings than a company with high earnings and low cash flows.

Why is income tax allocation necessary?

Because of differences between accounting and taxable income caused by the timing of revenues and expenses.

Why would the readers of financial statements be interested in management's choice of accounting methods and estimates?

Because of their effect on the company's quality of earnings. For example, by shortening the period over which it depreciates long-term assets, a company can increase its quality of earnings.

Would you expect a corporation's book value per share to equal its market value per share?

Book value per share is based on total assets minus total liabilities. Because assets are usually recorded at historical cost, one would not expect book value per share to equal market value per share.

What are three components of the income statement that affect quality of earnings?

Gains and losses on transactions, write-downs and restructurings, and non-operating items are components of the income statement that affect quality of earnings.

How does comprehensive income differ from net income?

It includes net income, changes in unrealized investment gains and losses, gains and losses from foreign currency translation, and other items affecting equity.

What is comprehensive income?

Items from sources other than stockholders that account for the change in stockholders' equity.

How does the concept of net of taxes affect the income statement?

On the income statement, net of taxes means that income taxes have been allocated among the various components of the statement so that each item, such as a gain or loss, is shown at an amount that is net of any tax consequences.

Where are the earnings per share disclosed in the financial statements?

On the income statement. Below the net income figure. They are broken down into income from: a) Income from continuing operations. b) Income before extraordinary items. c) Net income.

What is quality of earnings?

Quality of earnings refers to the substance of earnings and their sustainability into future accounting periods.

What is the formula for computing book value per share when a corporation has no preferred stock?

SE equity divided by number of common shares outstanding. SE Equity ___________ Number of Common Shares Outstanding

How do the statement of stockholders' equity and the stockholders' equity section of the balance sheet differ?

The statement of SE summarizes changes in the components of the SE section of the balance sheet. The SE section of the balance sheet lists the items of contributed capital and retained earnings on the balance sheet date.

What are deferred income taxes?

They are the difference between income tax expense and income tax payable.

When does a company have a simple capital structure?

When it has issued no preferred stocks, bonds, or stock options that can be converted to common stock.

When does a company have a complex capital structure?

When it has issued securities or stock options that can be converted to common stock.

When does a company have a deficit in retained earnings?

When its dividends and subsequent losses exceed its accumulated profits from operations.