会计学：企业决策的基础（管理会计分册）（原书第19版）课件 -Chap012 Revenue Recognition and Reporting Results of Operations

Chapter12RevenueRecognitionandReportingResultsofOperationsIntroduction:ExampleAcompany’spatternofsalesandnetincomeareimportantfactorsinevaluatingitsfinancialsuccess.ConsiderUnderArmour,Inc.whoseprinciplebusinessactivitiesarethedevelopment,marketinganddistributionofbrandedperformanceapparel,footwearandaccessoriesformen,women,andyouth.OneoftheattributesoffinanciallysuccessfulcompanieslikeUnderArmouristheirconsistentstrengthovertimeintermsofprimarymeasuresoffinancialperformance,suchasnetsalesandnetearnings.Introduction:UnderArmourThefollowingtrendscanbeobservedinviewingUnderArmour’sincomestatementsfrom2015to2017:NetRevenuesIncreased22percentfrom2015to2016Increased3percentfrom2016to2017Netrevenuesisthelargestsinglefigureinthecompany’sfinancialstatementsineachyear.Netincome,whichstartswithrevenuesandisreducedbyvariousexpensesrequiredtogeneratethosesales,increasedfrom(numbersinthousands)$232,573in2015to$256,979in2016andtoanetlossof$48,260.RevenueRecognitionWhenrevenueisincludedinacompany’sincomestatementitisconsidered“recognized.”Revenuerecognitionisanimportantprincipleoffinancialreportingthatdetermineswhenrevenueshouldberecordedandincludedinacompany’sfinancialstatements.Thegeneralprincipleisthatrevenueisrecognizedwhenithasbeenearned.Thismeansthatthecompanyreceivingtherevenuehasdoneeverythingrequiredinitsagreementwithacustomerandtheexpensesrelatedtotherevenuehavebeenincurredorcanbereasonablyestimated.Applicationofthematchingprinciplebecauserevenueismatchedwithexpensesrequiredtoearntherevenue.RevenueasaDriverRevenuehasasignificantimpactonanumberofotherfinancialstatementitemssuchascostofgoodssoldandotherexpenses,suchaswages,utilities,andtaxes.Inthestatementoffinancialposition(balancesheet),cashandreceivablesaredirectlytiedtotherevenuethatisrecognizedintheincomestatementforthesameperiod.Cashreceivedfromrevenuetransactionsthathavebeenrecognizedintheincomestatementisadirectdeterminantoftheamountofcashprovidedbyoperationsinthestatementofcashflows.RevenueasaContractAcontractisanagreementbetweentwoormorepartiesthatcreatesenforceablerightsandobligationforbothparties.Theearningandsubsequentrecognitionofrevenueisthedirectresultofacontractbetweenaseller(e.g.,aretailestablishment)andabuyer(e.g.,acustomer).Severalaspectsofsalestransactionsmaycomplicatetherevenuerecognitionprocessincludingtherightofreturnbythecustomer,paymentofamountspurchasedoncredit,warrantiespromisedbytheseller,andsoon.Forroutinetransactions,acrossalargenumberofsalestransactions,thefinancialimplicationsoftheseuncertaintiescanbeestimatedandgenerallydonotdelaytherecognitionofrevenue.PerformanceObligationsIndeterminingthecorrectamountandtimingofrevenuerecognition,performanceobligationsareparticularlyimportant.Aperformanceobligationisapromiseacompanymakestotransfergoodsand/orservicestoacustomer.Thetimingofrevenuerecognitionisdirectlytiedtothecompletionofperformanceobligationsinacontractwithacustomer.Asperformanceobligationsarecompleted,thesellerrecognizesrevenue.Sometransactionsinvolvemultipleperformanceobligationsinasingletransaction.Inthissituation,thesellermustseparatetherevenueintotwoormoreelements.PerformanceObligations:ExampleForexample,assumeanautomobiledealersellsavehicleandofferstwoadditionalservices.Oneisanextendedwarrantyfortwoyearsbeyondthemanufacturer’sthree-yearwarranty.Thesecondisanoptionalagreementtoservicethevehicleforthefirstthreeyears.Theautomobiledealerhasthreeperformanceobligations:todeliverthevehicle,tocompleteanywarrantyworkrequiredbytheextendedwarrantyagreement,andtoservicethevehicleforthedesignatedperiod.Theautomobiledealerallocatesthetotalamountreceivedamongthethreestreamsofrevenueandrecognizeseachasperformanceobligationsarecomplete.PerformanceObligations:Example(concluded)Forexample,assumethetotaltransactionamountis$35,000.Theextendedwarrantyisestimatedat5percentofthetotalprice,lesstheamountoftheserviceagreement,whichisestimatedtobe$400peryear.RevenuewouldberecognizedasfollowsDevelopingPredictiveInformationBecauseoftheimportanceofincomereportinginmakingassessmentsaboutthefuture,eventsandtransactionsotherthannormal,recurringrevenues,andexpensesrequirecarefulattentioninthepreparationandinterpretationofanincomestatement.Theresultsofitemsthatarenotlikelytorepeatonaregularbasisarepresentedseparatelyfromtheresultsofthecompany’snormal,recurringactivities.Twocategoriesofeventsandtransactionsthatrequirespecialtreatmentare(1)nonrecurringitemsthatareunusualinnatureand/oroccurinfrequentlyand(2)discontinuedoperationsinwhichaportionofthebusinesshasbeeneliminated.IrregularItems:AnIllustrationFarmerCorporationoperatesbothasmallchainofretailstoresandtwomotels.Duringthecurrentyear,thecompanysellsbothmotelstoanationalhotelchain.Inaddition,FarmerCorporationreportsoneunusualandinfrequentitem,alossonthesettlementofalawsuit.FarmerCorporation:IncomeStatementUnusualand/orInfrequentGainsandLossesUnusualand/orinfrequentgainsandlosses:Typicallydonotrecuroften.Donotoccurinpredictablepatterns.Aresometimesreferredtoasnonrecurringitems.Examplesinclude:Lossesduetolaborstrikes.Gainsorlossesonthesaleofplantassets.Lossesfromstormsandnaturaldisasters.Lossesduetolawsuits.Unusualand/orInfrequentGainsandLosses:TaxEffectsUnusualand/orinfrequentitemsarenotpresentedonanet-of-taxbasis.Anyincometaxeffectoftheseitemsiscombinedwiththeincometaxonnormal,recurringrevenueandexpensesandincludedintheitemIncomeTaxExpense.RestructuringChargesRestructuringchargesconsistofitemssuchaslosseson:Write-downsonplantassets.Saleofplantassets.Severancepayforterminatedworkers.Relocationofoperationsand/oremployees.Suchchargesarepresentedonthecompany’sincomestatementasasingleitem.Iftherestructuringinvolvesdiscontinuingasegment,thensuchexpensesshouldbepresentedaspartofdiscontinuedoperations.DiscontinuedOperationsWhenmanagemententersintoaformalplantosellordiscontinueasegmentofthebusiness,theresultsofthatsegment’soperationsareshownseparatelyintheincomestatement.Excludingthepartofthebusinessthatwillnolongeraffectthecompany’soperationsinthefutureenablesusersofthefinancialstatementstobetterevaluatetheperformanceofthecompany’songoing(continuing)operations.DiscontinuedOperations(concluded)Twoitemsareincludedinthediscontinuedoperationssectionoftheincomestatement:Theincomeorlossfromoperatingthesegmentpriortoitsdisposal.Thegainorlossondisposalofthesegment.KEYPOINTTheincometaxesrelatingtothediscontinuedoperationsareshownseparatelyfromtheincometaxexpenserelatingtocontinuingbusinessoperations.YourTurn:InvestorOneofthemostimportantdeterminantsofacompany’sstockpriceisexpectedfutureearnings.AssumethatyouareconsideringinvestinginWorshamCorporationandareevaluatingthecompany’sprofitabilityinthecurrentyear.Thenetincomeofthecorporation,whichamountedto$4,000,000,includesthefollowingitems.Lossonadiscontinuedsegmentofthebusiness(netoftax):$750,000GainonthesaleofLandtotheCityofPhoenix:$300,000Assumethegainonthesaleoflandisbasedonthetotalreceivedanddoesnotincludeincometaxes,whichareexpectedtobe30percent.AdjustnetincometodevelopanumberthatrepresentsastartingpointforpredictingthefuturenetincomeofWorshamCorporation.Explainthereasonforeachoftheadjustments.Explainhowthisadjustednumbermayhelpyoupredictfutureearningsforthecompany.EarningsperShareComputingearningspershareiseasiestwhenthecorporationhasissuedonlycommonstockandthenumberofoutstandingshareshasnotchangedduringtheyear.Inthiscase,earningspershareisequaltonetincomedividedbythenumberofsharesoutstanding.Theweighted-averagenumberofsharesfortheyearisdeterminedbymultiplyingthenumberofsharesoutstandingbythefractionoftheyearthatnumberofsharesoutstandingremainedunchanged.KEYPOINTEarningspershareappliesonlytocommonstock;preferredstockholdershavenoclaimtoearningsbeyondthestipulatedpreferredstockdividends.EarningsperShare:ExampleAssumeacompanyhad80,000sharesofcommonstockoutstandingduringthefirstninemonthsofthecurrentyear.Thecompanythensold60,000additionalsharessothat140,000shareswereoutstandingduringthelastthreemonthsoftheyear.Theweighted-averagenumberofsharesoutstandingfortheyearis95,000,determinedasfollows.Ifthecompany’snetincomefortheyearwas$250,000,earningpershareiscalculatedasfollows:$250,000÷95,000shares=$2.63.PreferredDividendsandEarningsperShareWhenacompanyhaspreferredstockoutstanding,thepreferredstockholdersparticipateinnetincomeonlytotheextentofthepreferredstock’sstateddividend.Todeterminetheearningsapplicabletothecommonstock,wefirstdeductfromnetincometheamountofcurrentyearpreferreddividends.Theannualdividendoncumulativepreferredstockisalwaysdeducted,evenifnotdeclaredbytheboardofdirectorsforthecurrentyear.Iftherearepreferreddividendsinarrears,onlythecurrentyear’spreferredstockdividendisdeductedintheearningspersharecomputation.Dividendsonnoncumulativepreferredstockaredeductedonlyiftheyhavebeendeclaredbytheboardofdirectors.EPSExamplewithPreferredDividendsAssumethatPerryCorporationhas200,000sharesofcommonstockand12,000sharesof$6cumulativepreferredstockoutstandingthroughouttheyear.Netincomefortheyeartotals$595,000.Earningspershareofcommonstockwouldbecomputedasfollows.PresentationofEPSontheIncomeStatementPubliclyownedcorporationsarerequiredtopresentearningspersharefiguresintheirincomestatements.Ifanincomestatementincludesdiscontinuedoperations,per-sharefiguresareshownforbothincomefromcontinuingoperationsandnetincome.Theper-sharecalculationforincomefromcontinuingoperationsiscomputedbysubstitutingthatamountforthenetincomefigureintheprecedingcalculation.PresentationofEPSontheIncomeStatement(concluded)InternationalCaseinPointValuationmultiplessuchasprice-earningsratiosareoftenusedtoestimateafirm’svalue.Theuseofpricemultiplestocomparefirmsfromdifferentcountriesischallengingformanyreasons.Oneimportantreasonisthatnationaldifferencesinaccountingprinciplesareasourceofcross-countrydifferences.Forexample,researchhasshownthatsuchdifferencesinaccountingprinciplescausep/eratiosinJapantobegenerallylowerthanintheUnitedStatesforcomparablecompanieswithsimilarfinancialresults.YourTurn:FinancialAnalystYouareworkingforastockmarketresearchfirmandyourbossasksyoutopresentananalysisofFoster,Inc.’sperformance,focusingprimarilyonearningspershare.HerprimarypurposeforhavingyoudothisanalysisistoconsiderwhetherFoster,Inc.,isagoodinvestmentintermsofthecompany’sexpectationsforfutureprofitability.InanalyzingFoster,Inc.’sincomestatementyoudeterminethefollowing.Onthebasisofonlythelimitedinformationpresentedabove,whatisyourrecommendationtoyourbossregardingFoster,Inc.’sprospectsforfutureprofitability?Justifyyourconclusion.BasicandDilutedEarningsperShareBasicearningspershareisbasedontheweighted-averagenumberofcommonsharesactuallyoutstandingduringtheyear.Dilutedearningspershareincorporatestheimpactthatconvertibleinstrumentswouldlikelyhaveonbasicearningspershare.Convertibleinstrumentsmayinclude:PreferredstockConvertiblebondsStockoptionsCashDividendsInvestorsbuystockinacorporationwiththeexpectationofgettingtheiroriginalinvestmentbackaswellasearningareasonablereturnonthatinvestment.Thereturnonastockinvestmentisacombinationofthefollowing:Theincreaseinvalueofthestock(stockappreciation).Cashdividends.RequirementsforCashDividendsRetainedearnings.Theoreticalmaximumfordividendsisthebalanceofretainedearnings.Manycompanieslimitdividendstoasmallportionofnetincomeinordertoretainmoniestogrowthebusiness.Adequatecashposition.Thecompanymusthaveenoughcashinordertopaydividends.Dividendactionbytheboardofdirectors.Formalactionbytheboardofdirectorsisnecessarytodeclareadividend.DividendDatesFoursignificantdatesareinvolvedinthedistributionofadividend.Theseareasfollows.Dateofdeclaration.

Onthedayonwhichthedividendisdeclaredbytheboardofdirectors,aliabilitytomakethepaymentcomesintoexistence.Ex-dividenddate.

Theex-dividenddateissignificantforinvestorsincompanieswhosestockstradeonstockexchanges.Apersonwhobuysthestockbeforetheex-dividenddateisentitledtoreceivethedividendthathasalreadybeendeclared;conversely,astockholderwhosellssharesbeforetheex-dividenddatedoesnotreceivethedividend.DividendDates(concluded)Dateofrecord.

Thedateofrecordfollowsthedateofdeclaration,usuallybytwoorthreeweeks,andisstatedinthedividenddeclaration.Tobeeligibletoreceivethedividend,apersonmustbelistedinthecorporation’srecordsastheownerofthestockonthedateofrecord.Dateofpayment.

Thedeclarationofadividendincludesanindicationofthedateofpaymentaswellasthedateofrecord.Usuallythedateofpaymentcomestwotofourweeksafterthedateofrecord.DateofDeclarationDateofDeclarationBoardofdirectorsdeclaresthedividend.Recordaliability.OnDecember15,theboardofdirectorsdeclaresa$1.00persharecashdividendonits125,000commonsharesoutstanding.ThedividendispayabletostockholdersofrecordonJanuary10andpaidonJanuary25.Ex-DividendDateandDateofRecordEx-DividendDateDetermineswhoreceivesthedividendNoentrymadeDateofRecordSignificantprimarilyforthestocktransferagentandthestockregistrar.NoentrymadeDateofPaymentRecordthepaymentofthedividendtostockholders.DateofPaymentOnJune1,2022,acorporation’sboardofdirectorsdeclaredadividendforthe2,500sharesofits$100parvalue,8percentpreferredstock.ThedividendwillbepaidonJuly15.WhichofthefollowingwillbeincludedintheJuly15entry?DebitCash$20,000.DebitDividendsPayable$20,000.CreditDividendsPayable$20,000.CreditPreferredStock$20,000.DividendDates:ExampleOnJune1,2022,acorporation’sboardofdirectorsdeclaredadividendforthe2,500sharesofits$100parvalue,8percentpreferredstock.ThedividendwillbepaidonJuly15.WhichofthefollowingwillbeincludedintheJuly15entry?DebitCash$20,000.DebitDividendsPayable$20,000.CreditDividendsPayable$20,000.CreditPreferredStock$20,000.DividendDates:Example(concluded)$100×8%=$8dividendpershare$8×2,500=$20,000totaldividendLiquidatingDividendsAliquidatingdividendoccurswhenacorporationpaysadividendthatexceedsthebalanceintheRetainedEarningsaccount.Liquidatingdividendsusuallyarepaidonlywhenacorporationisgoingoutofexistenceorismakingapermanentreductioninthesizeofitsoperations.Stockholdersmayassumethatadividendrepresentsadistributionofprofitsunlesstheyarenotifiedbythecorporationthatthedividendisareturnofinvestedcapital.StockDividendsStockdividendisatermusedtodescribeadistributionofadditionalsharesofstocktoacompany’sstockholdersinproportiontotheirpresentholdings.Thedividendthathasbeendeclaredissatisfiedbyissuingadditionalsharesofstockratherthanbeingpaidincash.Moststockdividendsconsistofadditionalsharesofcommonstockdistributedtoholdersofcommonstock.CashDividendsvs.StockDividendsCashDividendsDistributionofcashbyacorporationtoitsshareholders.Reducesbothassetsandstockholders’equity.StockDividendsNodistributionofassets.Nochangeinassets,liabilities,ortotalstockholders’equity.KEYPOINTEachstockholderreceivesadditionalshares,buthisorherpercentageownershipinthecorporationisnolargerthanbefore.

StockDividend:IllustrationAssumethatacorporationwith2,000sharesofcommonstockoutstandingisownedequallybyJamesDavisandSusanMiller,eachowning1,000sharesofstock.Thecorporationdeclaresastockdividendof10percentanddistributes200additionalshares(10percentof2,000shares),with100sharesgoingtoeachofthetwostockholders.DavisandMillernowhold1,100sharesapiece,buteachstillownsone-halfofthebusiness.Furthermore,thecorporationhasnotchangedinsize;itsassetsandliabilitiesanditstotalstockholders’equityareexactlythesameasbeforethedividend.RecordingStockDividendsInaccountingforrelativelysmallstockdividends,themarketvalueofthenewsharesistransferredfromtheRetainedEarningsaccounttothepaid-incapitalaccounts.Thisprocesssometimesiscalledcapitalizingretainedearnings.Theoveralleffectonstockholders’equityisthesameasifthedividendhadbeenpaidincash,andthestockholdershadimmediatelyreinvestedthecashinthebusinessinexchangeforadditionalsharesofstock.StockDividend:ExampleAssumethatonJune1,AspenCorporationhasoutstanding100,000sharesof$5parvaluecommonstockwithamarketvalueof$25pershare.Onthisdate,thecompanydeclaresa5percentstockdividend,distributableonJuly15tostockholdersofrecordonJune20.TheentryatJune1torecordthedeclarationofthisdividendisasfollows:ReasonsforStockDividendsManagementoftenfindsstockdividendsappealingbecausetheyallowmanagementtodistributesomethingofperceivedvaluetostockholderswhileconservingcashthatmaybeneededforotherpurposeslikeexpandingfacilitiesandintroducingnewproductlines.Stockholdersfavorstockdividendsbecausetheyreceivemoresharesandforsmallstockdividends,oftenthestockpricedoesnotfallproportionately.Also,thedividendisnotsubjecttoincometaxes(untilthesharesreceivedaresold).

CaseinPointAninvestorwhopurchased100sharesofHomeDepot,Inc.,in1985wouldhavepaidabout$1,700.Fifteenyearslater,thatstockwasworthabout$273,000!Doesthismeanthateachshareincreasedinvaluefrom$17tomorethan$2,730?No—infact,thisprobablycouldn’thappen.Investorsliketobuystockinlotsof100shares.At$2,730pershare,whocouldafford100shares?Certainlynottheaveragesmallinvestor.CaseinPoint(concluded)HomeDepot’sboardofdirectorswantedtoattractsmallinvestors.Theseinvestorshelpcreatemoredemandforthecompany’sstock—andinmanycases,theyalsobecomeloyalcustomers.SoasthepriceofHomeDepot’sstockrosewiththesuccessofthecompany,theboarddeclaredseveralstocksplitsandstockdividends.Aninvestorwhohadpurchased100sharesin1985ownedover3,900shares15yearslaterwithouteverhavinghadpurchasedadditionalshares.Eachsharehadamarketvalueof$70,apriceconsideredaffordabletotheaverageinvestor.DistinctionbetweenStockSplitsandStockDividendsThedifferencebetweenastockdividendandastocksplitliesin:Theintentofmanagement.Therelatedissueofthesizeofthedistribution.Astockdividendusuallyisintendedtosubstituteforacashdividendandissmallenoughthatthemarketpriceofthestockisrelativelyunaffected.Stockdividendsdonotresultinachangeintheparvalueofthestock.Stocksplitstypicallyrepresentamuchlargerincreaseinthenumberofoutstandingshares.Stocksplitsaredesignedtobringdownthemarketpricepershare.Stocksplitsresultinaproratareductionintheparvalueofthestock.StatementofRetainedEarningsInadditiontoabalancesheet,anincomestatement,andastatementofcashflows,somecompaniespresentastatementofretainedearnings.PriorPeriodAdjustmentsAcompanymaydiscoverthatamaterialerrorwasmadeinthemeasurementofnetincomeinaprioryear.BecausenetincomeisclosedintotheRetainedEarningsaccount,anerrorinreportednetincomecausesanerrorintheamountofretainedearningsshowninallsubsequentbalancesheets.Whensucherrorsarediscovered,theymustbecorrected.Thecorrection,calledapriorperiodadjustment,isshowninthestatementofretainedearningsasanadjustmenttothebalanceofretainedearningsatthebeginningofthecurrentyear.Theamountoftheadjustmentisshownnetofanyrelatedincometaxeffects.PriorPeriodAdjustment:IllustrationAssumethatlatein2021SaltLakeCorporationdiscoversthatitfailedtorecorddepreciationoncertainassetsin2020.Afterconsideringtheincometaxeffectsofthiserror,thecompanyfindsthatthenetincomereportedin2020wasoverstatedby$35,000.Thebeginning2021balanceoftheRetainedEarningsaccount($750,000atDecember31,2020)alsoisoverstatedby$35,000.Thestatementofretainedearningsin2021mustincludeacorrectionoftheretainedearningsatthebeginningoftheyear.PriorPeriodAdjustment:Illustration(concluded)ReportingPriorPeriodAdjustmentsPriorperiodadjustmentsrarelyappearinthefinancialstatementsoflargepubliclyownedcorporations.ThefinancialstatementsofthesecorporationsareauditedannuallybyCertifiedPublicAccountantsandarenotlikelytocontainmaterialerrorsthatsubsequentlywillrequirecorrectionbypriorperiodadjustments.Iferrorsarefoundinthecourseofanaudit,thefinancialrecordsarecorrectedbeforetheyaremadepublic.Priorperiodadjustmentsaremorelikelytoappearinthefinancialstatementsofcloselyheldcorporationsthatarenotauditedonanannualbasis.RestrictionsofRetainedEarningsSomeportionofretainedearningsmayberestrictedbecauseofvariouscontractualagreements.Arestrictionofretainedearningspreventsacompanyfromdeclaringadividendthatwouldcauseretainedearningstofallbelowadesignatedlevel.Mostcompaniesdiscloserestrictionsofretainedearningsinnotesaccompanyingthefinancialstatements.ComprehensiveIncomeComprehensiveincomeisatermthatidentifiesthetotalofnetincomeplusorminustheelementsofothercomprehensiveincome.Comprehensiveincomemaybedisplayedtousersoffinancialstatementsinoneoftwoways.Asasecondincomestatement.Oneincomestatementdisplaysthecomponentsofnetincome,asillustratedthroughoutthischapter.Thesecondincomestatementdisplaysthecomponentsofcomprehensiveincome,oneelementofwhichisnetincome.Ifthisoptionisselected,inthecompany’sannualreport,theStatementofComprehensiveIncomemustimmediatelyfollowtheIncomeStatementthatshowsthedeterminationofnetincome.ComprehensiveIncome(concluded)Asasingleincomestatementthatincludesboththecomponentsofnetincomeandthecomponentsofothercomprehensiveincome.StatementofStockholders’EquityStockholders’EquitySectionoftheBalanceSheetLearningObjectiveSummaryLO12-1LO12-1:Definetheprincipleofrevenuerecognition,includingtheconditionsthatmustbemetforrevenuetoberecognizedinthefinancialstatements.Revenuerecognitionreferstothetimingofwhenrevenueisrecordedandincludedinacompany’sincomestatement.Asageneralprinciple,revenueisrecognizedwhenithasbeenearned,whichmeansthattheperformanceobligationsofthesellerhavebeensatisfied.LearningObjectiveSummaryLO12-2LO12-2:Describehowirregularincomeitems,includingunusualand/orinfrequentitemsanddiscontinuedoperations,arepresentedintheincomestatement.

Itemsthatareunusualand/orinfrequentarepresentedintheincomestatementwithnormal,recurringrevenuesandexpenses,butwithseparateline-itemdisclosure.Whenanidentifiablesegmentofthebusinesshasbeendiscontinued,asubtotalforIncomefromContinuingOperationsisshown,followedbythediscontinuedoperation.Discontinuedoperationsisfurtherseparatedintotheresultsofoperationsandanygainorlossonthedisposal,bothonanet-of-taxbasis.LearningObjectiveSummaryLO12-3LO12-2:Computeearningspershareanddistinguishbetweenbasicanddilutedearningspershare.

Theearningspersharefigureiscomputedbydividingtheincomeapplicabletothecommonstockbytheweighted-averagenumberofcommonsharesoutstanding.Dilutedearningspershareiscomputedforcompaniesthathaveoutstandingsecuritiesconvertibleintosharesofcommonstockandotherarrangementsthatcouldresultinanincreasednumberofoutstandingshares.Thepurposeofshowingbothbasicanddilutedearningsistoalertinvestorstotheextenttowhichanincreasednumberofsharescouldreducebasicearningspershare.LearningObjectiveSummaryLO12-4LO12-4:Accountforcashdividendsandstockdividends,andexplaintheeffectsofthesetransactionsonacompany’sfinancialstatements.

Cashdividendsreduceretainedearningsatthetimethecompany’sboardofdirectorsdeclaresthedividends.Atthattime,thedividendsbecomealiabilityforthecompany.Stockdividendsgenerallyarerecordedbytransferringthemarketvalueoftheadditionalsharestobeissuedfromretainedearningstotheappropriatepaid-incapitalaccounts.Stockdividendsincreasethenumberofsharesoutstandingbutdo