Book 1 - Chapter 31

19.

The weighted average number of shares is:

Period	Shares	Months	Weighted Total
Jan. 1–April 1	500,000	3	1,500,000
April 2–Oct. 30	800,000	7	5,600,000
Oct. 31–Dec. 31	650,000	2	1,300,000
Total		12	8,400,000

(8,400,000/12) = 700,000 weighted average shares

Earnings available to common stockholders: $2,750,000 − (100,000 × $100 × .08) = $1,950,000
($1,950,000/700,000) = $2.786 earnings per share

20.

Comprehensive income is a separate number that includes net income. Prior period
adjustments and changes in accounting principle are direct adjustments to the beginning
balance of retained earnings. Note: An accumulated prior effect of a change in accounting
principle was recorded as part of net income for many years (as a special item). For all fiscal
years beginning in 2006 and thereafter, this practice was eliminated..

21.

Discussion Questions and Brief Exercises

The statement of retained earnings shows the balance of retained earnings at the beginning of the
accounting period, summarizes all current period changes in retained earnings, and shows the final
balance of retained earnings as of the end of the accounting period. The statement of stockholders’
equity also shows beginning and ending balances and current period changes; however, it is a more
comprehensive statement. The statement of stockholders’ equity shows total stockholders’ equity
and all items that are part of stockholders’ equity , including retained earnings. Many companies
prepare a statement of stockholders’ equity instead of a statement of retained earnings.

Operating income: Operating revenues minus cost of goods sold and operating expenses. “Other”
revenue and expense and gain and loss items are not included in this number.

Income from continuing operations: This income number combines operating income with
“other” items, minus income tax expense on the combined amount.

Income before extraordinary item: This income number combines income from continuing
operations with the net of tax amount from discontinued operations. It is the amount of income
before any extraordinary items are added or subtracted.

Net income: This is the final earnings amount from business activities. It does not include
any “other comprehensive income” items.

Special item 1: Discontinued operations. This refers to the discontinued activity of a significant
segment of a business. The results of discontinuing the activity must be disclosed as two parts:
(1) The net income or net loss, net of tax, of the discontinued segment and (2) the gain or loss,
net of tax, resulting from the disposal of the segment. The combined effect of these two parts is
reported as “discontinued operations.”
Special item 2: Extraordinary gain or loss: These are gains or losses that result from events that
are both unusual and infrequent. Even if infrequent, items cannot be considered extraordinary
if they are not unusual as a part of business activities or given the particular circumstances of a
business. For example, a flood loss would be considered extraordinary unless a business is
located in a place where floods have occurred in the past. Business events such as strikes,
lawsuits, and asset write-offs are not extraordinary.

Learning Goal 31, continued

SOLUTIONS

Section VI · Corporations

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