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1 12 Special Income, Investment & Reporting Issues
1
12 Special Income, Investment & Reporting
Issues
2
LEARNING GOALSLEARNING GOALS
1Prepare income statement reporting unusual items.
3
LG 1
What is significance of “Income From Continuing
Operations?”
4
EXHIBIT EXHIBIT 11
LG 1
5
INCOME FROM CONTINUING OPERATIONS
INCOME FROM CONTINUING OPERATIONS
• Reports income from normal operations– Expected to continue– Used to estimate future income
• Focal point for analyzing income trends
LG 1
6
EXAMPLES: Unusual Items Below Income from continuing operations
EXAMPLES: Unusual Items Below Income from continuing operations
• Items that adjust income from continuing operations– Discontinued operations
• Gain, loss from disposing of business segment
– Extraordinary item• Unusual and infrequent event, transactions
– Changes in accounting principles
LG 1
7
Unusual Items Below the LineLG 1
8
LEARNING GOALSLEARNING GOALS
2Prepare income statement reporting earnings per share data.
9
LG 2
What is earnings per share?
Basic earnings per share reports the net income
earned by 1 share of common stock.
10
EARNINGS PER SHARE: Calculation with Preferred Stock
EARNINGS PER SHARE: Calculation with Preferred Stock
LG 2
Earnings per share =
(Net income – Preferred Stock Dividends) /
# Shares Common Stock Outstanding
11
EXERCISE 12-12EXERCISE 12-12
Glow-Rite Lighting Co. had earnings of $740,000. The company had 125,000 shares common stock & 50,000 shares of $100 par value preferred stock with $6 per share dividend. Calculate basic earnings per share.
LG 2
EPS =
(Net Income – P/S Dividend) /
# Shares C/S
($740,000 - $6*50,000)/125,000 = $3.52
12
LEARNING GOALSLEARNING GOALS
3Describe accounting for investments in stocks.
13
LG 3
Why do companies invest in equity securities
of other companies?
Companies invest in equity securities short term to
earn a return & long term to gain control.
14
TEMPORARY INVESTMENT IN STOCKS
TEMPORARY INVESTMENT IN STOCKS
• Short term investment in equity securities– Trading securities are actively traded– Available-for-sale securities
• Not actively traded but expected to be sold
– Earn dividend revenue
• Reported as “Marketable Securities” in current assets
LG 3
15
REPORTING TEMPORARY INVESTMENTS
REPORTING TEMPORARY INVESTMENTS
• Temporary investments reported at fair market value– Recognize differences between fair market
value and book value– Record unrealized holding gain/loss
LG 3
16
REPORTING TEMPORARY INVESTMENTS: ExampleREPORTING TEMPORARY INVESTMENTS: Example
Crabtree Co.
Common
Stock Cost Market
Unrealized Gain (Loss)
Edwards $150,000 $190,000 $40,000
SWS 200,000 200,000 ----
Inis 180,000 210,000 30,000
Bass 160,000 150,000 <10,000>
Total $690,000 $750,000 $60,000
Income Taxes ($18,000)
Net after taxes $42,000
LG 3
17
Temporary investments reported with unrealized gain/loss net of tax
LG 3
18
LONG-TERM INVESTMENT IN STOCKS
LONG-TERM INVESTMENT IN STOCKS
• Long-term investment in equity securities– Reported in Investments section of long term
assets• Without significant influence (< 20% ownership),
reported at fair market value– Reported like available-for-sale securities
• With significant influence, use equity method
LG 3
19
REPORTING UNDER EQUITY METHOD
REPORTING UNDER EQUITY METHOD
• Stock purchase recorded at cost
• Subsequently adjusted by the following
Increased by Investee share in net income
Decreased by Cash dividends received
LG 3
20
LG 3
Are equity securities only reported on the
balance sheet?
GAAP requires companies to explain investment
policies in a footnote to financial statements.
21
eBay SECURITIES FOOTNOTE
eBay SECURITIES FOOTNOTE
Short- and long-term investments, which include marketable equity securities, municipal, government and corporate bonds, are classified as available-for-sale and reported at fair value using the specific identification method. Realized gains and losses are included in earnings and were immaterial in all periods presented. Unrealized gains and losses are excluded from earnings and reported as a component of other comprehensive income (loss), net of related estimated tax provisions or benefits.
LG 3
22
INVESTMENT IN BONDSINVESTMENT IN BONDS
• Investments in bonds are reported as– Available-for-sale securities in Current
Assets if held for sale– Held-to-maturity securities in Investments if
intended to be held for life• Reported at amortized cost
LG 4
23
LG 4
How does a company record an investment in bonds if
A $1,000 bond cost 102 +
$5.30 brokerage fee +
$10.20 accrued interest?
24
LEARNING GOALSLEARNING GOALS
5Compute, interpret price-earnings, price-book ratios.
25
LG 5
How does an investor compare market price of
different stock investments?
Investors use Price-earnings ratio and Price-
book ratio to compare investments.
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PRICE-EARNINGS RATIOPRICE-EARNINGS RATIO
Explains stock price as a multiple of earnings
LG 5
Price-Earnings Ratio (PE) =
Market Price per Share /
Earnings per Share (EPS)
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PRICE-EARNINGS RATIO:eBay
PRICE-EARNINGS RATIO:eBay
12/31
Market price per share
EPS PE
2002 33.91 0.43 79
2003 64.61 0.69 94
2004 116.34 1.18 99
LG 5
28
PRICE-EARNINGS RATIO:eBay
PRICE-EARNINGS RATIO:eBay
3M Fastenal
12/31 Market price per share
EPS PE Market price per share
EPS PE
2004 82.07 3.83 28.83 .86
2005 77.50 4.18 36.20 1.10
LG 5
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PRICE-EARNINGS RATIO:eBay
PRICE-EARNINGS RATIO:eBay
3M Fastenal
12/31 Market price per share
EPS PE Market price per share
EPS PE
2004 82.07 3.83 21.4 28.83 .86 33.5
2005 77.50 4.18 18.5 36.20 1.10 32.9
LG 5
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PRICE-EARNINGS RATIO:eBay
PRICE-EARNINGS RATIO:eBay
3M Fastenal
12/31 PE PE
2004 21.4 33.5
2005 18.5 32.9
LG 5
For which company are investors more optimistic?
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PRICE-BOOK RATIOPRICE-BOOK RATIO
Explains stock price as a multiple of book value of a company’s stock
LG 5
Price-Book Ratio =
Market Price per Share /
Book value per Share
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eBay’s Price-Book ratio for 2004 would be
$116 / $10.20 =
11.37
What does this ratio value mean?
ANALYZING PRICE-BOOK RATIO
ANALYZING PRICE-BOOK RATIO
LG 5
