Chapter 12

The Corporate Income Statement

and Statement of Stockholders’
Equity

Slide 12.1
 Chapter 12 Learning
Objectives
Identify the key elements of the corporate
income statement.
Compute earnings per share.
Account for corporate income taxes.
Describe the structure and purpose of a
statement of stockholders’ equity.
Account for prior period adjustments and
appropriations of retained earnings.
Compute and interpret the price-earnings and
market price to book value ratios.

Slide 12.2
 The Corporate Income
Statement . . . A Closer Look
What types of external decision
makers rely on financial data reported
in corporate income statements?

Investors
Suppliers
Prospective employees
And many others

Slide 12.3
 Alternative Income Statement
Titles and Formats

Approximately one-half of
all public companies use a
title other than “Income
Statement” for their
periodic income
statements.
Most common alternative titles:
Statement of Earnings and
Statement of Operations.
Two alternative formats for
income statements: single-
step and multiple-step.

Slide 12.4
Key Elements of the Corporate
Income Statement

Income from Continuing

Operations
Discontinued Operations
Extraordinary Items
Cumulative Effect of a Change in
Accounting Principle
Earnings per Share

Slide 12.5
 Extraordinary items:
material gains and losses that
are both . . .
unusual in nature and
infrequent in occurrence.

Slide 12.6
Corporate Income Taxes . . . a
few notes
Certain items on a corporate income statement
are reported net of income taxes, such as
extraordinary items.
Corporations are subject to a progressive
federal income tax rate structure.
Pretax accounting income and taxable income
are typically not equal.
Temporary differences: differences between
pretax accounting income and taxable
income arising from applying different
accounting methods for taxation and
financial accounting purposes.
Deferred Income Taxes: an account in which a
corporation records the difference between
its income tax expense and income tax
payable.

Slide 12.7
Sources of Temporary Differences
for Pinkerton’s, Inc.

Allowance for Doubtful

Accounts
Self-Insurance Reserves
Depreciation
Retirement Benefits
Investment Losses
Vacation Pay
Amortization of Intangibles

Slide 12.8
Example of an entry
to record income
tax expense . . .

Income Tax Expense 143,000

Income Taxes Payable 106,000
Deferred Income Taxes 37,000

Slide 12.9
 Statement of Stockholders’
Equity . . .

. . . reconciles the beginning-

of-the-year and end-of-
the-year balances of a
company’s stockholders’
equity accounts.

Slide 12.10
Two Interesting Items that May
Appear in a Statement of
Stockholders’ Equity . . .

Prior period adjustment: a correction of

a material error occurring in a previous
accounting period that involved a
revenue or expense item.*

*recorded directly to Retained Earnings in the period the

error is discovered

Appropriation of retained
earnings: a part of retained earnings
that has been earmarked for a
special purpose.

Slide 12.11
 Price-Earnings (P/E) Ratio

Equation: Current Market Price of Common Stock

Earnings per Share for Most Recent 12 months

Purpose: used to assess the

reasonableness of the market
prices of common stocks.

Interpretation: reveals how much

investors are willing to pay for
each $1 of a company’s earnings.

Slide 12.12
 Market Price to Book Value
Ratio

Equation: Current Market Price of Common Stock

Book Value per Share

Purpose: used to assess the

reasonableness of the market
prices of common stocks.

Interpretation: reveals how much

investors are willing to pay for
each $1 of a company’s net assets.

Slide 12.13