Page 539 - Accounting Principles (A Business Perspective)

13. Corporations: Paid-in capital, retained earnings, dividends, and treasury stock

• The correction of the USD 200,000 error adds only USD 120,000 to retained earnings (Exhibit 106). This
result occurs because the mistake was included in the 2009 tax return and taxes were underpaid by USD

80,000. In the 2010 return, the USD 80,000 of taxes would have to be paid.
Analyzing and using the financial results—Earnings per share and price-earnings ratio

A major item of interest to investors and potential investors is how much a company earned during the current
year, both in total and for each share of stock outstanding. Firms calculate the earnings per share amount only for
the common shares of ownership. They compute earnings per share (EPS) as net income available to common
stockholders divided by the average number of common shares outstanding during that period. Income available
to common stockholders is net income less any dividends on preferred stock. They deduct the regular preferred
dividend on cumulative preferred stock (but not a dividend in arrears) whether or not declared; however, they
deduct only declared dividends on noncumulative preferred stock.
To illustrate, Sun Microsystems, Incorporated, had 3,417,000,000 weighted-average common shares
outstanding with income available to common shareholders of USD 922,590,000 during a recent year. Sun would

compute EPS as follows:
Incomeavailable forcommon stockholders
EPS=
Weighted−average number of common sharesoutstanding
USD922,590,000
=
3,417,000,000
= USD 0.27 per share
Firms calculate EPS for each major category on the face of the income statement. In other words, they make an
EPS calculation for income from continuing operations, discontinued operations, extraordinary items, changes in
accounting principle, and net income. Note in Exhibit 104 that Anson reports the EPS amounts at the bottom of its
income statement.

The price-earnings ratio (current market price per share of common stock divided by EPS) provides an index
on whether a stock has future high income potential compared to other stocks. Stocks with future high income
potential tend to have a high price-earnings ratio.
In the financial highlights of Kimball International, Incorporated's, recent annual report, the market price at
year-end was USD 16.00. Earnings per share were USD .93 (average of class A & B common stock). Kimball would
compute its price-earnings ratio that day as follows:
Current market price per shareof commonstock
Price−earnings ratio=
EPS
USD16.00
=
USD0.93
= USD 17.20
This chapter completes the study of stockholders' equity. In Chapter 14, you learn about stock investments and
international accounting.
Understanding the learning objectives

• Paid-in capital is presented in the stockholders' equity section of the balance sheet. Each source of paid-in
capital is listed separately.
• Sources of paid-in capital are:

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