what is the purpose of arranging an income statement to show subtotals for incom
ID: 2371796 • Letter: W
Question
what is the purpose of arranging an income statement to show subtotals for income from continuing operations and income before extraordinary items?
Define extraordinary items. How are extraordinary items distinguished from items that are presented as seperate-line items in an income statement, but are not extraordinary.
A prior period adjustment relates to the income of past accounting periods. explain how such an item is shown in the financial statements.
Explain how each of the following is computed: a price-earnings ratio. b. Basic earnings per share. c. Diluted earnings period
What is a liquidation dividend, and how does it relate to a regular (nonliquidating) dividend?
Explanation / Answer
1) Income from operations show the money that the company earns through it's daily operations. This subtotal gives investors an idea of how the company is doing without the distortion of tax rates or extraordinary items. Items that occur after the income before extraordinary item subtotal are infrequent and unusual events. Therefore this subtotal is important because it is of better use to investors regarding the future heading of the company. Totals after extraordinary items would distort the company's continuing operations if taken as normal.
2) Extraordinary items are material events and transactions that are both unusual in nature and infrequent in occurence. This criteria depends highly on the industry of the company. The other seperate-line items satisfy just one of the criteria of an extraordinary item. These items are material and either unusual or infrequent, but not both.
3) Journal entries would be made to correct any balance sheet items that are affected by the adjustment and beginning retained earnings (on the statement of retained earnings) would be either increased or decreased to reflect the change. Any prior statements that are incorrect as a reult of the error would be retroactively restated. Disclosure notes would be made in any adjusted financial statements.
4)a. Price-earnings ratio= Market price per share / earnings per share
b. Earnings per share (basic)= (Net income - preferred dividends) / common shares outstanding*
*common shares outstanding are weighted by the length of time the shares have been outstanding.
c. Earnings per share (diluted)= (Net income - preferred dividends + after tax interest savings)
/ (common shares outstanding + exercised options + bond conversions)
5) A liqudation dividend is one that requires payment in excess of retained earnings. That is, the amount of the dividend is greater than the balance in retained earnings so the company must liquidate other invested capital to cover the dividend. If the balance in retained earnings is sufficient to cover the dividend then it is nonliquidated.
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