Stock Marketing

Retained earnings

2011-07-20T03:12:00.000-07:00

Since dividends represent a distribution of earnings to stockholders, the theoretical maximum for dividends is the total undistributed net income of the company, represented by the credit balance of the Retain Earnings account. As a practical matter, many corporations limit dividends to somewhere near 40 % of annual net income, in the belief that a major portion of the net income must be retained in the business if the company is to grow and to keep pace with its competitors.

Ex-dividend date

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The ex-dividend date is significant for investors in companies with stocks traded on the stock exchanges. To permit the compilation of the list of stockholders as of the record date, it is customary for the stock to go ex-dividends three business days before the date of record. A stock is said to be selling ex-dividend on the day that it loses the right to receive the latest declared dividend.

Dividend Action

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Even through a company’s net income is substantial and its cash position seeming satisfactory, dividends are not paid automatically. A formal action by the board of directors is necessary to declare a dividend.

Date of Payment

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The declaration of a dividend always includes announcement of the date of payment as well as the date of record. Usually the date of payment comes from two or four weeks after the date of record.

Date of record

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The date of record always follows the date of declaration, usually by a period of two or three weeks, and is always stated in the dividend declaration. In order to be eligible to receive the dividend, a person must list as the owner of the stock on the date of record.

Date of Declaration

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On the day on which the dividend is declared by the board of directors, a liability to make the payment comes into existence.

An adequate cash position

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The fact that the company reports large earnings does not mean that it has a large amount of cash on hand. Cash generated from earnings may have been invested in new plant and equipment, or in paying off debts, or in acquiring larger inventors. There is no necessary relationship between the balances the Retain Earnings account and the balance in the Cash amount. The traditional expression of “paying dividends out of retained earnings” is misleading. Cash dividends can be paid only “out of “cash.

Weighted Average Number of Share Outstanding

2011-07-20T03:06:00.000-07:00

The simplest example of computing earning per share is found when a company has issued only common stock and the number of shares outstanding has not changed during the year. In this situation, the net income for the year divided by the number of shares outstanding at year end equals earning per share.

The cumulative Effect of an Account Change

2011-07-20T03:04:00.000-07:00

In reporting most changes in an accounting principle, the cumulative effect of the change upon the income of prior years is shown in the income statement of the year in which the change is made. To compute this one time catch up adjustment we recomputed the income of prior years as if the new accounting method had always been in use. The difference between this recomputed net income and the net income actually reported in those periods is the “cumulative effect” of the accounting change.

Reporting Unusual Items

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To illustrate the presentation of those items assume that Ross Corporation operates both a small chain of retail stores and two motels. Near the end of the current year, the company sells both motels to a national hotels chain. In addition, Ross Corporation reports two “extraordinary items” and also changes the method used in computing depreciation expense. An income statement illustrating the correct format for reporting those events.

Reporting the Result of Operation

2011-07-20T03:02:00.000-07:00

The most important aspect of corporate financial reporting in the view of most stock holders is the determination of period net income. Both the market price of common stock and the amount of cash dividends per share depend to a considerable extent on the current level of earning (net income). Even more important than the absolute amount of net income is the trend of earning over time.

Primary and Fully Diluted EPS

2011-07-20T03:01:00.000-07:00

Let us assume that a company has an outstanding issue of preferred stock that is convertible into shares of common stock at a rate of, say, two shares of common for each share of preferred. The conversion of this preferred stock would increase the number of common shares outstanding and might dilute (reduce) earnings per share. Any common stockholder interested in the trend of earnings per share will want to know what effect the conversion of the preferred stock would have upon this statistic.

Presentation of EPS

2011-07-20T02:59:00.000-07:00

All publicly owned corporations are required to present earnings per share data in their income statement. IF an income statement includes subtotals for income from continued operations or for income before extraordinary items, per share is shown for these amounts as well as for net income. These additional per share amounts are computed by substituting the amount of the appropriate subtotal for the net income figure in the preceding calculation.

Preferred Dividends and Earnings per share

2011-07-20T02:58:00.000-07:00

When a company has preferred stock outstanding, the preferred stockholders participate in net income to the extent of the preferred stock dividends. To determine the earnings applicable to the common stock, we first deduct from net income the amount of current year preferred stock dividends. The annual dividend on cumulative preferred stock is always deducted, even if not declared by the board of directors for the current year. Noncumulative preferred stock dividends are deducted only if declared.

Other “Unusual” Gain or Losses

2011-07-20T02:57:00.000-07:00

Some transaction is not typical of normal operation but also do not meet the criteria for separate presentation as extraordinary items. Among such events are losses incurred because of strikes and the gains or losses resulting from sales of plant assets. Such items, if material, should be individually listed as items of revenue or expense, rather than being combined with other items in broad categories such as sales revenue or general and administrative expense.

Interpreting the Different Per-share Amount

2011-07-20T02:54:00.001-07:00

To informed user of financial statements, each of these figures has a different significance. Earnings per share from continuing operation represents the results of continuing and ordinary business activity. This figure is the most useful one for predicting future operation result. Net earning per share, on the other hand, shows the overall operating results of the current year, including any discontinued operations or extraordinary items.

Income from Continuing Operation

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The subtotal income from continuing operation measures the profitability of the ongoing operation. This subtotal should be helpful in making predictions of the company future earnings. For example, if we predict no significant change in the profitability of its retail stores, we would expect Ross Corporation to earn a net income of approximately $700,000 next year.

Extraordinary items

2011-07-20T02:53:00.000-07:00

The second category of events requiring disclosure in a separate section of the income statement is extraordinary items. An extraordinary item is a gain or loss that is (1) material in amount (2) unusual in nature, and (3) not expected to recur in the foreseeable future. By definition, extraordinary items are extremely rare; hence, they seldom appear in financial statement. Example of extraordinary items includes the effects of unusual casualties such as earthquakes or tornadoes; expropriation or condemnation of assets by a governmental agency; and gain or losses that may result from a newly enacted law or from the early retirement of long terms debt.

Earnings per Share (ESP)

2011-07-20T02:51:00.001-07:00

Perhaps the most widely used of all accounting statistic is earning per share of common stock. Everyone who buys or sells stock in a corporation needs to know the annual earning per share. Stock market prices are quoted on a per share basis. If you considering investing in IBM stock at a price of, say, $120 per share, you need to know the earning per share and the annual dividend per share in order to decide whether this price is reasonable. In order words, how much earning power and how much dividend income would you be getting for each share you buy?

Changes in Accounting Principle

2011-07-20T02:50:00.002-07:00

The accounting principle of consistency means that a business should continue to use the same accounting principle and methods from one period to the next. However, this principle does not mean that a business can never make a change in its accounting methods. A change may be made if the need for the change can be justified and the effects of the change are properly disclosed in the financial statements.

Discontinued operations

2011-07-20T02:50:00.000-07:00

If management enters into a formal plan to sell or discontinued a segment of the business, the result of those segments operations is shown separately in the income statement. This enables users of the financial statement to better evaluate the performance of the company’s ongoing (continued) operation.

Discontinued Operation of the Business

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To qualify for separate presentation in the income statement the discontinued operations must represent an entire segment of the business. A segment of a business is a separate line of the business activity or an operation that services a distinct category of customers.

Discontinued Operation Are Not Really

2011-07-20T02:47:00.001-07:00

In recent years, a characteristic of the American economy has been the restructuring of many large corporations. As part of this restructuring, corporations often sell one or more segments of the business. Thus, the presence of discontinued operations is not uncommon in the income statements of large corporations.

Developing predictive information

2011-07-20T02:46:00.000-07:00

An income statement tells us a great deal about the performance of a company over the past year. For example study of the income statement make clear the types and amount of revenge earned and expense incurred as well as the amount of gross profit and net income. Bet can we expect the income statement for the next year to indicate about the same level of performance? If the transaction summarized in the income statement for the year just completed were of a normal recurring other nature, such as selling merchandise, paying employees, and incurring other normal expense, we can reasonably assure that the operating result were typical and that somewhat similar result can be expected in the following year.

Continuing Operation

2011-07-20T02:45:00.000-07:00

The first section of the income statement contains only the result of continuing business activities that is, the retail stores. Notes that the income taxes expense shown in this section relates only to continuing operations. The income taxes relating to the special items are shown separately in the income statement as adjustments to the amount of these items.