Book 1 - Chapter 31

Income tax expense appears in three places on a corporate income statement. It is calculated on:

Income from continuing operations before tax

Discontinued operations (net of tax)

Extraordinary items (net of tax)

880,000 shares are outstanding: 440,000 × 2 = 880,000

20,000 shares are in treasury: 10,000 × 2 = 20,000

900,000 shares are issued: 880,000 + 20,000 = 900,000

The total cost of the treasury stock is unchanged at $300,000.

The cost per share is now $300,000/20,000 = $15 per share.

[$3,850,000 − (150,000 × $100 × .09)]/700,000 weighted average shares = $3.57

Period	Shares	Months	Weighted Total
Jan. 1–April 30	450,000	4	1,800,000
May 1–May. 31	440,000	1	440,000
June. 1–Dec. 31	880,000	7	6,160,000
Total		12	8,400,000

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

An increasing earnings per share (EPS) is favorable, and a decreasing earnings per share is
unfavorable. An increasing EPS means that each stockholder is sharing in more income. This
can happen because the company is earning more income and/or because there are fewer shares
outstanding. Most investors consider the EPS calculated for income from continuing
operations to be the most significant number on the income statement. This is because income
from continuing operations represents the results of the essential recurring activities of a
business and also because the trend in this amount serves as guide for probable future results.

Preferred dividends are subtracted from income when calculating earnings per share because
the calculation is intended to show the amount of income available to common stockholders.

The preferred stockholders’ claim is subtracted from total stockholders’ equity because the
book value calculation is intended to show the common stockholders’ claim.

10.

Earnings per share of common stock: . . . . . . . . . . . . . . . . . . . . . .
	Income from continuing operations . . . . . . . . . . . . . . . . . . . .	$2.24
	Discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	.75
	Income before extraordinary item . . . . . . . . . . . . . . . . . . . . .	2.99
	Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	(.48)
	Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	$2.51

11.

Other comprehensive income: This is the amount of the unrealized loss on the investments:
$120,000.

Comprehensive income: This is net income combined with other comprehensive income:
$340,000 – $120,000 = $220,000.

These two items usually are shown on a statement of stockholders’ equity (see example in
this section), but they can also be shown on the income statement below net income. (It is
also permissible to show them in a separate statement of comprehensive income, but this is
not usually done.)

Learning Goal 31, continued

SOLUTIONS

Learning Goal 31: Corporate Financial Statements

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