ACCTG 101 Lecture Notes - Lecture 14: Comprehensive Income, Retained Earnings, Cash Flow

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23 Oct 2020

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Treasury stock is the repurchase of the company"s own stock from the stock market. To illustrate, assume that 3,000 common shares of accenture previously issued for are repurchased for . Interpreting accumulated other comprehensive income and its components. Other comprehensive income is not recorded on the income statement but rather on the balance sheet as retained earnings. Unrealized gains and losses are added to accumulated other comprehensive income. A combined statement of income and comprehensive income. Gains and losses on derivatives and hedges. The income statement reports at least one, and often two, eps figures: Earnings per common share based on the average number of common shares outstanding during the year. Eps is only computed for common stock. Diluted earnings per share is computed on actual and assumed common shares outstanding. It gives investors and analysts the worst case scenario if all of the dilutive securities were converted into common shares.

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Common Stock Issuance, Treasury Stock, Preferred Stock,Dividends, Comprehensive Income, Disclosure. Castleline,Inc. reported the following shareholdersâ equity section as of thebeginning of the current year:

Stockholder's Equity

Contributed Capital:
Common Stock, $1 Par Value, 3,850,000 shares authorized,905,000 shares issued, and 821,500 shares outstanding	$905,000
Additional Paid-in Capital in Excess of Par-Common	22,625,000
Total Contributed Capital:	$23,530,000
Retained Earnings:	$8,957,450
Accumulated Other Comprehensive Income	1,057,600
Less: Treasury Stock (83,500 common stock shares at cost)	(1,670,000)
Total Stockholders Equity:	$31,875,050

During the current year, Castleline engaged in the followingtransactions affecting the stockholdersâ equity section of itscurrent balance sheet.

Issued 400,000 shares of its $1 par value common stock at $31per share. The underwriter charged a 3% fee for issuing the shares.The stock issue costs are not capitalized.

Issued 500,000 shares of $10 par value 6% preferred stock(2,550,000 authorized) at $40 per share. These shares wereprivately placed and Castleline did not pay stock issue costs.

Purchased 220,000 shares of common stock at $32 per share.

Declared a $450,000 dividend for the first half of the year.(The declarations should be recorded separately for the common andthe preferred shares.)

Sold 105,000 of the treasury shares at $44 per share. (The83,500 treasury shares on hand at the beginning of the year areconsidered sold first. The company paid $20 per share for theseshares of treasury stock).

Paid the cash dividends.

Reported net income of $3,180,500 for the current year.

In addition to the net income, Castleline incurred an $801,000unrealized loss on an available-for-sale investment.

Declared a $450,000 cash dividend for the second half of theyear. (The declarations should be recorded separately for thecommon and the preferred shares.)

Closed out all dividends and other comprehensive incomeaccounts.

Required Â»

Prepare all journal entries required to record the transactionslisted above.

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Common Size Income statement
	2017		2016
	$M	Percentage	$M	Percentage
Operating revenue	2319	100%	2375	100%
Operating expenses	-1666	-71.84%	-1725	-72.63%
Earnings before interest, tax, depreciation, amortisation,changes in fair value of hedges and other signifcant items(EBITDAF)	653	28.16%	650	27.37%
Depreciation and amortisation	-264	-11.38%	-236	-9.94%
Impairment of assets	-10	-0.43%	-4	-0.17%
Loss on sale of assets	-4	-0.17%	-1	-0.04%
Net change in fair value of electricity and other hedges	-76	-3.28%	-15	-0.63%
Operating profit	299	12.89%	402	16.93%
Finance Cost	79	3.41%	80	3.37%
Interest Income	2	0.09%	2	0.08%
Net change in fair value of treasury instruments	55	2.37%	-68	-2.86%
Net profit before tax	277	11.94%	256	10.78%
Income tax expense	-80	-3.45%	-71	-2.99%
Net proft after tax attributed to the shareholders of the parentcompany	197	8.50%	185	7.79%
Earnings per share (EPS) attributed to ordinary equityholders of the parent	cents		cents
Basic and diluted earnings per share	7.7	0.33%	7.2	0.30%

COMPREHENSIVE INCOME STATEMENT

2017

2016

Percentage

Net profit after tax

197

8.50%

185

7.79%

Other comprehensive income

Intems that will not be reclassifed to profit or loss

Asset revaluation

428

18.46%

889

37.43%

Defferred tax on the above item

-120

-5.17%

-248

-10.44%

Items that may be reclassified to profit or loss

308

641

Net gain on cash flow hedges

0.09%

Exchange differences arising from translation of foreignoperation

0.04%

-23

-0.97%

Income tax on the above items

0.13%

-23

-0.97%

Other comprehensive income for the year, net of tax

311

13.41%

618

26.02%

Total comprehensice income for the year, net of tax attributedto shareholders of parent company

508

21.91%

803

33.81%

BALANCE SHEET

	2017		2016
	$M	Percentage	$M	Percentage
Current Assets
Cash and cash equivalents	80	0.92%	118	1.38%
Trade receivables	260	3.00%	194	2.27%
Financial Instruments	59	0.68%	71	0.83%
Other assets	32	0.37%	23	0.27%
Total Current Assets	432	5.00%	406	5.00%
Non-current assets
Property, plant and equipment	7961	91.88%	7771	91.02%
Intangible assets	58	0.67%	47	0.55%
Deferred tax	43	0.50%	40	0.47%
Financial Instruments	172	1.98%	274	3.21%
Total non-current assets	8234	95.00%	8132	95.00%
Total assets	8665	100.00%	8538	100.00%
Current Liabilities
Payables and accuals	296	3.42%	205	2.40%
Employee entitlements	15	0.17%	15	0.18%
Current portion of termborrowings	170	1.96%	214	2.51%
Finance lease payable	1	0.01%	1	0.01%
Financial Instruments	67	0.77%	48	0.56%
Current tax payable	30	0.35%	30	0.35%
Total current Liabilities	579	6.68%	513	6.01%
Non-current liabilities
Term borrowings	1022	11.79%	1000	11.71%
Deferred tax	1710	19.73%	1617	18.94%
Provisions	9	0.10%	8	0.09%
Finance lease payable	46	0.53%	47	0.55%
Financial Instruments	124	1.43%	203	2.38%
Term payables	93	1.07%	100	1.17%
Total non-current liabilities	3004	34.67%	2975	34.84%
Total liabilities	3583	41.35%	3488	40.85%
Net assets	5082	58.65%	5050	59.15%
Shareholders' equity
Share capital	1598	18.44%	1597	18.70%
Reserves	3484	40.21%	3453	40.44%
Total shareholders' equity	5082	58.65%	5050	59.15%

Using the following financial ratiosfor 2016 and 2017 periods, and other associated

information available in the publicdomain, assess the financial health of MEL from the

view of an investor.

Liquidity ratios

b) Asset management efficiencyratios

c) Profitability ratios

d) Market ratios

Assume you are a banker evaluating aloan request from Meridian Energy Limited

(MEL) for $220 million. ConsideringMELâs recent earnings announcements and

earnings forecast updates, what wouldbe your concerns in deciding on approval or

denial of the loan request? Use thecompanyâs capital structure ratios for 2016 and 2017

in your explanation.

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1. Sork Inc. has a portfolio of marketable securities classified as available-for-sale securities. At the end of the year, the fair values of the securities exceeded their costs. How should Sork report the unrealized gains on its portfolio of marketable securities in the statement of stockholdersâ equity?

I. Only the cumulative amount of net gains are reported in the statement of stockholdersâ equity.

II. Only current period changes in the value of the investment are reported in the statement of stockholdersâ equity.

III. A correct journal entry to report unrealized gains would be an increase to the investment and an increase to other comprehensive income.

Multiple Choice

a. I and III only

b. II and III only

c. I only

d. III only

2. During 20X9, Alpha Co. purchased debt securities classified as trading securities. At the end of 20X9, the market value of Alphaâs investment in debt securities exceeded the amortized cost. Alpha should report the debt securities on its 20X9 balance sheet at

Multiple Choice

a. Amortized cost

b. Market value

c. Cost

d. Lower of cost or market

3. Misk Co. purchased the following securities during 20X7 to be classified as held-to-maturity securities, trading securities, or available-for-sale securities:

I. Debt securities bought and held for the purposes of reselling in the near future.

II. U.S. Treasury bonds that Misk intends and is able to hold to maturity.

III. Convertible preferred stock that Misk does not intend to sell in the near future.

Which of above securities purchased by Misk should be classified as available-for-sale securities?

Multiple Choice

a. I and II only

b. I and III only

c. III only

d. None of the above

4. Data regarding Rock Corp.âs available-for-sale securities follows:

	Cost		Market Value
December 31, 20X7	$	80,000	$	65,000
December 31, 20X8	$	80,000	$	90,000

Differences between cost and market values are considered temporary. Rock does not elect the fair value option of accounting for available-for-sale securities.

Rockâs accumulated other comprehensive income would be

Multiple Choice

a. $0

b. $10,000

c. $25,000

d. $15,000

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ACCTG 101 Lecture Notes - Lecture 14: Comprehensive Income, Retained Earnings, Cash Flow

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