Understand the uses and limitations of an income

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Chapter 4 / Exercise EX4-26
Accounting
Reeve/Warren
Expert Verified
1.Understand the uses and limitations of an income statement.2.Describe the content and format of the income statement.3.Prepare an income statement.4.Explain how to report various income items.5.Identify where to report earnings per share information.6.Understand the reporting of accounting changes and errors.7.Prepare a retained earnings statement.8.Explain how to report other comprehensive income.After studying this chapter, you should be able to:Income Statement and Related Information4LEARNING OBJECTIVESLEARNING OBJECTIVES
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Accounting
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Chapter 4 / Exercise EX4-26
Accounting
Reeve/Warren
Expert Verified
4-48A significant business indicator.Measures the dollars earned by each share of common stock.Must be disclosed on the income statement.LO 5 Identify where to report earnings per share information.Net Income - Preferred Dividends Weighted Average of Common Shares OutstandingEarnings per ShareReporting Various Income Items
Illustration: Lancer, Inc. reports net income of $350,000. It declares and pays preferred dividends of $50,000 for the year. The weighted-average number of common shares outstanding during the year is 100,000 shares. Lancer computes earnings per share as follows:Earnings per Share- $50,000$350,000100,000=$3.00per shareLO 5 Identify where to report earnings per share information.Net Income - Preferred Dividends Weighted Average of Common Shares OutstandingAdvance slide in presentation mode to reveal answers.
4-50EPSDivide by weighted-average shares outstanding Illustration 4-19Earnings per ShareLO 5
4-51As mentioned in the opening story, the FASB and the IASB are collaborating on a joint project related to presentation offinancial statements. In 2008, these two groups issued an exposure draft that presented examples of what these new financial statements might look like. Recently, they conducted field tests on two groups: preparers and users. Preparerswere asked to recast their financial statements and then comment on the results. Users examined the recast statements and commented on their usefulness. One part of the field test asked analysts to indicate which primary performance metric they use or create from a company’s income statement. They were provided with the following options: (a) Net income; (b) Pretax income; (c) Incomebefore interest and taxes (EBIT); d) Income before interest, taxes, depreciation, and amortization (EBITDA); (e) Operating income; (f) Comprehensive income; and (g) Other. The adjacent chart highlights their responses. WHAT’S YOUR PRINCIPLEDIFFERENT INCOME CONCEPTSAs indicated, Operating income (31%) and EBITDA (27%) were identified as the two primary performance metrics that respondents use or create from a company’s income statement. A majority of the respondents identified a primary performance metric that uses net income as its foundation (pretax income would be in this group). Clearly, users and preparers look at more than just the bottom-line income number, which supports the common practice of providing subtotals within the income statement.

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