121_11SG - Chapter 11Using the Income Statement and the...

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Chapter 11 282 Chapter 11—Using the Income Statement and the Financial Statement Notes: Additional Corporate Reporting Issues CHAPTER OVERVIEW Throughout the last four chapters we have examined a variety of topics related to the balance sheet. In chapter 7, we looked at plant and intangible assets, in chapter 8 current and long-term liabilities, in chapter 9 stockholders’ equity, and in chapter 10, long-term investments and international operations. While each of these topics impacts the income statement, the primary focus was the balance sheet. We now turn our attention to an in-depth examination of the corporate income statement. The learning objectives for this chapter are to 1. Analyze and use the elements of a complex income statement. 2. Account for a corporation’s income tax. 3. Analyze a statement of stockholders’ equity. 4. Interpret notes to the financial statements. 5. Use segment and interim financial data for decision making. 6. Understand managers’ and auditors’ responsibilities with regard to the financial statements. CHAPTER REVIEW Objective 1 - Analyze and use the elements of a complex income statement. Investors may want to examine the trend of a company’s earnings and the makeup of its net income. Therefore, the corporation income statement starts with income from continuing operations, follows with income or loss from discontinued operations and extraordinary gains and losses, and concludes with earnings per share of common stock. Continuing operations are expected to continue in the future. Income from continuing operations helps investors make predictions about future earnings. Income from continuing operations is shown both before and after income tax has been deducted. One way potential investors evaluate income from continuing operations is to determine the present value of a company’s future income, then compare this result with the company’s market value. To determine present value, an assumption must be made about an appropriate interest rate (also called the investment capitalization rate ). To determine market value , multiply the number of outstanding shares of common stock times the stock’s current selling price. Comparing these two values helps investors evaluate the company. If the estimated value of the company (based on the present value of future earnings) is greater than the current market value of the company, an investor would be more likely to consider the company favorably. Rather than evaluating based on the total market value of the company, an investor could do a similar kind of analysis for a single share of stock. Using the same investment capitalization rate, divide it into the estimated annual earnings per share. If the result is greater than the current market price for one share of stock, the company is considered more favorably as an investment. When a corporation sells one of its segments, the sale is reported in a section of the income statement
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121_11SG - Chapter 11Using the Income Statement and the...

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