Brief Learning
Exercises Objectives Skills
B. Ex. 12.1 Extraordinary loss 12-1 Analysis
B. Ex. 12.2 Extraordinary gain 12-1 Analysis
B. Ex. 12.3 Discontinued operations 12-1 Analysis
B. Ex. 12.4 Cash and stock dividends 12-4 Analysis
B. Ex. 12.5 Statement of retained earnings 12-5 Analysis
B. Ex. 12.6 Statement of retained earnings 12-5, 12-6 Analysis
B. Ex. 12.7 Cash dividend journal entries 12-4 Analysis
B. Ex. 12.8 Stock dividend journal entries 12-4 Analysis
B. Ex. 12.9
12-4, 12-8 Analysis
B. Ex. 12.10 Comprehensive income 12-7 Analysis
Skills
12.1 Stock dividends and stock splits 12-4 Analysis, communication
12.2 Terminology 12-1–12–4,
12-6, 12-7 Analysis
12.3 Discontinued operations 12-1, 12-2 Analysis
12.4 Extraordinary items 12-1, 12-2 Analysis
12.5 12-2 Analysis
12.6 12-2, 12-4 Analysis
12.7 Stock dividends and s
p
lits 12-4 Anal
y
sis
12.8 12-4 Communication
12.9 12-8 Analysis
12.10 12-2, 12-4 Communication
12.11 Identifying source of desired
financial information 12-1, 12-5,
12-8 Analysis
12.12 Comprehensive income 12-7 Analysis
12.13 Cash and stock dividends 12-4 Analysis, communication,
judgment
12.14 Real World: Home Depot 12-3, 12-5 Analysis, communication
EPS and dividends
TopicExercises
Effects of transactions upon
earnings per share
CHAPTER 12
INCOME AND CHANGES
Learning
Objectives
IN RETAINED EARNINGS
OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL
THINKING CASES
Topic
Stockholders’ equity section of
balance sheet
Earnings per share: effect of
preferred stock
Restating earnings per share for
stock dividends
Effect of stock dividends on stock
price
Effects of transactions upon
financial measurements
Education.
12.15 Real World: Home Depot 12-1, 12-8 Analysis, communication
Anal
y
sis of stock information
Problems
Sets A, B Skills
12.1 A,B Reporting unusual events 12-1, 12-2 Analysis
12.2 A, B Format of statements of income
and retained earnings 12-1, 12-2,
12-5, 12-6 Analysis, communication
12.3 A, B Reporting unusual events: a
comprehensive problem 12-1, 12-2,
12-5, 12-6 Analysis, communication
12.4 A, B 12-4 Analysis, communication
12.5 A, B Statement of stockholders’ equity 12-4, 12-8 Analysis, communication
12.6 A, B 12-4, 12-8 Analysis
12.7 A, B 12-8 Analysis, communication
12.8 A, B Stockholders’ equity:
comprehensive 12-4, 12-8 Analysis
12.9 A, B Format of an income statement 12-1, 12-2 Analysis
12.1 12-1 Analysis, communication
Reporting special events
12.2 12-1 Analysis, communication
12.3 Interpreting earnings per share 12-1–12-3 Analysis, communication
12.4 12-8 Analysis, communication
12.5 Classifying unusual items 12-1, 12-2,
12-8 Analysis, communication
12.6 Managing profitability 12-9 Analysis, communication
12.7 12-2
Technology
Critical Thinking Cases
Real World: Atlantic Richfield
Company, American Airlines,
Union Carbide Corp., Georgia
Pacific Corporation
Analyzing statement of stockholders’
equity
Forecasting continuing
operations
Analyzing stockholders’ equity and EPS
Communication, research,
Learning
Objectives
Effects of transactions upon
financial measurements
Stock splits, stock dividends,
treasury stock, and book value
Dividends and treasury stock
transactions
Topic
(Ethics, fraud & corporate
governance)
Real World: Martin Marietta
Education.
DESCRIPTIONS OF PROBLEMS AND
CRITICAL THINKING CASE
S
Problems (Sets A and B)
12.1 A,B
12.2 A,B
12.3 A,B
12.4 A,B
12.5 A,B
12.6 A,B
12.7 A,B
Below are brief descriptions of each problem and case. These descriptions are accompanied by the estimate
d
time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the
partially filled-in working papers.
30 Easy
30 Medium
20 Easy
Phoenix, Inc./Dexter, Inc.
Given an incorrectly prepared income statement, students are asked
to draft a revised income statement and a statement of retained
earnings. Includes discontinued operations, an extraordinary item,
an accounting change, and a prior period adjustment.
Albers, Inc./Sunstone, Inc.
Demonstrates the effect of various transactions upon total
stockholders’ equity, number of shares outstanding, and book value
per share. Includes stock splits, stock dividends, and treasury stock
transactions.
35 Strong
40 Strong
Eastern Aviation/Pacific Airlines
Slick Software, Inc./Beach, Inc.
A comprehensive problem on reporting the results of operations.
Stresses the format of an income statement and statement of
retained earnings, with disclosure of “unusual items.” EPS
computation involves common and preferred stock outstanding.
30 Strong
Preparation of a condensed income statement and earnings per
share figures for a company with a discontinued segment and an
extraordinary loss. Emphasizes format of the income statement
rather than computation of amounts. Students also are asked to
forecast future operating results.
20 Medium
A comprehensive problem on cash dividends, stock dividends, and
treasury stock transactions. Requires journal entries and preparation
of stockholders’ equity section of the balance sheet. Students are
asked to compute maximum amount available for dividends.
Tech Process, Inc./Hot Water, Inc.
Explanation of the effects of equity transactions on various
financial measures.
Riverton Corporation/ Dry Wall, Inc.
Preparation of a statement of stockholders’ equity. Stresses an
understanding of the effects of various transactions upon the
elements of stockholders’ equity.
Thompson Service/Greene, Inc.
12.8 A,B
12.9 A,B
Critical Thinking Cases
12.1
12.2
12.3
12.4
12.5
Four “unusual events” taken from the published financial statements of
well-known corporations. Students are asked to indicate whether each
event qualifies as an extraordinary item, a discontinued operation, or an
accounting change.
Interpreting a Statement of Stockholders’ Equity
Student is asked to answer specific questions requiring analysis and
understanding of items reported in the statement of stockholders’ equity.
Students discuss the classification of unusual items from several
perspectives—accounting principles, pressures on management, cash
flows, and probable effects on stock price. Adapted from an actual case;
illustrates the “real world” aspects of financial reporting. Good group
assignment.
Classification of Unusual Items – and the Potential Financial
Im
p
ac
t
Is There Life Without Baseball?
Student is presented with an income statement containing discontinued
operations and an extraordinary item and is asked to forecast future
earnings. Requires an understanding of recurring versus nonrecurring
events. Good practice for interpreting annual reports.
Student is given six earnings per share figures, including earnings from
continuing operations, earnings before extraordinary items, and net
earnings, computed on both a basic and diluted basis. From this
information, student is asked to determine the amount of the
extraordinary loss, to use a p/e ratio to estimate stock price, and to
forecast future performance.
Using Earnings Per Share Statistics
60 Strong
50 Strong
25 Strong
20 Easy
20 Medium
30 Strong
35 Strong
Mandella Corporation/Adams Corporation
Preparation of the stockholders’ equity section of a balance sheet in two
successive years. Transactions affecting stockholders’ equity include
issuance of common stock, a stock dividend, purchase and sale of
treasury stock, cash dividends, and a stock split.
Esper Corporation/Cardinal Manufacturing Corp.
What’s This?
Preparation of a partial income statement, including discontinued
operations, an extraordinary loss, and an accounting change.
Emphasizes format of the income statement rather than computation of
amounts. Students also are asked to compute earnings per share.
Critical Thinking Cases (cont’d).
12.6 30 Medium
12.7
Students are to obtain information on the Internet about a Fortune 500
company and an emerging company. They are to compare p/e ratios and
speculate on the reasons for the differences.
30 Easy
Students must consider how certain financial statement items should
move in relation to other numbers and whether the specific changes
indicated in the case statement imply inappropriate actions by
mana
g
ement.
Managing Profitability
Ethics, Fraud & Corporate Governance
Comparing Price-Earnings Ratios
Internet
Education.
SUGGESTED ANSWERS TO DISCUSSION QUESTION
S
1.
2.
3.
4.
5.
6.
7. a.
b.
The purpose of presenting subtotals such as Income from Continuing Operations and Income
before Extraordinary Items is to assist users of the income statement in making forecasts of future
The restructuring charges should be combined and presented as a line item in the company’s
income statement in determining operating income.
In predicting future earnings for the company, the charges generally should not be considered to
The discontinued operations classification is used in the income statement only when a business
discontinues an entire segment of its activities. Frank’s has two business segments—pizza parlors
Extraordinary items are gains and losses that are unusual in nature and not expected to recur in
the foreseeable future.
Separate line-item presentation should be made for items that are unusual in nature or infrequent
A prior period adjustment represents a correction of an error in the amount of income reported in a
prior period. Prior period adjustments are shown in the statement of retained earnings (or
beginning of the period in which the error is identified.
Irregular income items, such as extraordinary items, discontinued operations, and prior period
adjustments, are legitimate parts of the earnings history of a company. On the other hand, they are
The price-earnings ratio is computed by dividing the market price of a share of common
stock by the annual earnings per share.
The amount of basic earnings per share is computed by dividing the net income available for
securities are assumed to have been converted.
Education.
8. a.
3,000,000
b.
3,000,000
Common shares outstanding throughout the year ……………………………….
Common shares outstanding throughout the year ………………………………
…
Shares used in computing diluted earnings per share:
Shares used in computing basic earnings per share:
12.
If the price of the stock declines in proportion to the distribution of shares in a stock dividend, at the
time of that distribution the stockholder does not benefit. He/she holds exactly the same percentage of
the outstanding shares, and the value per share has declined in proportion to the increased number of
shares. Often, however, the value does not drop in proportion to the increased number of shares,
Education.
$75,000
(60,000)
$15,000
$750,000
Expenses 600,000
B.Ex. 12.4
110,000 shares x $0.50 = $55,000
Number of shares outstanding after stock dividend:
100,000 shares x 110% = 110,000
Cash required to pay $0.50 per share dividend:
Revenues
SOLUTIONS TO BRIEF EXERCISES
Extraordinary loss from tornado damage, net of $40,000 income
taxes
B.Ex. 12.2 HUDSON COMPANY
Income Statement
For year ended _______________
B.Ex. 12.1 FELLUPS, INC.
Partial Income Statement
For year ended _______________
Income before extraordinary item
Net income …………………………………………………………….