Exam 14: The Corporate Income Statement and the Statement of Stockholders Equity

Which of the following would be used when computing earnings per share for a company with a complex capital structure?

Book value per share refers to the

The value at which one share of stock can be bought or sold is called

An analysis of the nature of nonoperating items is important in judging the quality of the net income figure.

In recent years, Welty Products Corporation, a small manufacturer of industrial products for the waste management industry, has followed the practice of issuing a 10 percent stock dividend annually. Although the company's net income has been almost $4 million in each of the past three years, retained earnings have declined from about $10 million to about $6 million. What is the probable motivation for management's decision to issue an annual 10 percent stock dividend? What is the most likely explanation for the decrease in retained earnings? Given your explanation, would stockholders' equity also decrease by a like amount?

The amount of income taxes expense appearing on a corporation's income statement must be calculated in accordance with the matching principle.

The quality of earnings is an indication of the sustainability of earnings into future accounting periods.

At December 31, 2010, the book value per share of common stock of Big Time Corporation amounted to $21 per share. Determine the effect of each of the following items on the book value per share of common stock computation assuming each item occurs after December 31, 2010. Consider each item independently of the other items listed. Indicate your answer for each (I = increase, D = decrease, or NE = no effect) in the appropriate blank. _____ 1. Sale of newly issued shares of common stock at $23 per share _____ 2. Purchase of treasury stock for $16 per share _____ 3. Declaration of current cash dividends on preferred stock _____ 4. Declaration and distribution of stock dividends on common stock _____ 5. Sale of treasury stock (purchased at $16 per share) for $19 per share _____ 6. Entry to close net income for the period to the Retained Earnings account _____ 7. Dividends in arrears on preferred stock _____ 8. Purchase of a truck with cash _____ 9. Payment of a previously declared and recorded cash dividend on common stock

Par value or stated value is arbitrarily set when stock is authorized.

A stock dividend will cause an increase in total contributed capital at the date the dividend is declared.

The account Common Stock Distributable is classified as a current liability.

The balance of the Retained Earnings account represents

Corporate income statements must be prepared in multistep form.

For an item to be reported as extraordinary,

A company with a high quality of earnings is one that has earned a substantial profit for the period.

Haskell, Inc., reported the following income before income taxes, income taxes expense, and net income for 2009 and 2010: In 2009, Haskell deducted a $35,000 item for income tax purposes that was not deducted for accounting purposes until 2010. Haskell's marginal tax rate is 40 percent. Prepare entries in journal form without explanations to record Haskell's income taxes expense and income taxes payable for each year, assuming that income tax allocation procedures are used properly.

A stock dividend does not affect the total amount of stockholders' equity.

In a period of inflation, which of the following combinations of accounting methods will yield the lowest amount of current earnings?

At the beginning of 2008, Kurt Franz retired as president and principal stockholder in KRF Corporation, a successful producer of personal computer equipment. As an incentive to the new management, Franz supported the board of directors' new executive compensation plan, which provides cash bonuses to key executives for years in which the company's earnings per share equal or exceed the current dividends per share of $2.00, plus a $.20 per share increase in dividends for each future year. Thus, for management to receive the bonuses, the company must earn per-share income of $2.00 the first year, $2.20 the second, $2.40 the third, and so forth. Since Franz owns 500,000 of the 1,000,000 common shares outstanding, the dividend income will provide for his retirement years. He is also protected against inflation by the regular increase in dividends. Earnings and dividends per share for the first three years of operation under the new management were as follows: During this time, management earned bonuses totaling more than $1 million under the compensation plan. Franz, who had taken no active part on the board of directors, began to worry about the unchanging level of earnings and decided to study the company's annual report more carefully. The notes to the annual report revealed the following information: 1. Management changed from the LIFO inventory method to the FIFO method in 2008 x6. The effect of the change was to decrease cost of goods sold by $200,000 in 2008 x6, $300,000 in 2009, and $400,000 in 2010. 2. Management changed from the double-declining-balance accelerated depreciation method to the straight-line method in 2009. The effect of this change was to decrease depreciation by $400,000 in 2009 and by $500,000 in 2010. 3. In 2010, management increased the estimated useful life of intangible assets from five to ten years. The effect of this change was to decrease amortization expense by $100,000 in 2010. a. Compute earnings per share for each year according to the accounting methods in use at the beginning of 2008 6. (Use common shares outstanding.) b. Have the executives earned their bonuses? What serious effect has the compensation package apparently had on the net assets of KRF Corporation? How could Franz have protected himself from what happened?

An excess of income taxes expense over income taxes payable will result in recording a