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Unformatted text preview: oncept reports virtually all wealth related transactions in a reporting period These transactions are categorized as operating, non­operating, and irregular income items INCOME AND WEALTH INCOME AND WEALTH (CONT.) Operating income represents wealth created by core business activities Non­operating income results from financing transactions (e.g., interest expense) and non­core activities (e.g., loss on the disposal of fixed assets) INCOME AND WEALTH INCOME AND WEALTH (CONT.) Irregular items only sporadically affect income Often involve substantially monetary amounts Reported on a net of tax basis Cover three types of gains (losses): discontinued business operations, extraordinary (unusual and infrequent) items, and changes in accounting principles INCOME AND WEALTH INCOME AND WEALTH (CONT.) Comprehensive income Items that affect wealth but are not reported on the income statement (e.g., market adjustments to available­for­sale securities) Usually reported as a separate component of shareholders’ equity (i.e., the changes to wealth bypass the income statement) INCOME AND WEALTH INCOME AND WEALTH (CONT.) Earnings per share (EPS) Reports the amount of income earned by one share of stock Eliminates the size bias inherent in aggregate income disclosures Computed as (net income – preferred dividends) / weighted number of outstanding shares of common stock INCOME AND WEALTH INCOME AND WEALTH (CONT.) Capital structure determines EPS disclosure A simple capital structure consists of common stock and possibly preferred shares A complex capital structure includes convertible securities and stock options, which would dilute EPS if they were exercised An entity with a simple capital structure discloses a single EPS number, called basic EPS An entity with a complex capital structure discloses two EPS numbers (dual disclosures), referred to as basic and diluted EPS EARNINGS QUALITY EARNINGS QUALITY An assessment as to the extent to which reported income disclosures change an entity’s underlying wealth All income components do not af...
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