To illustrate, assume that one of Jones Corporation’s divisions changes from the
declining-balance method to the straight-line method of depreciation. As shown in
Exhibit 1, the cumulative effect of this change is reported after the extraordinary items.
If financial statements for prior periods are also presented, they should be restated as
if the change had been made in the prior periods, and the effect of the restatement
should be reported either on the face of the statements or in a note.
Reporting unusual items separately on the income statement allows investors to
isolate the effects of these items on income and cash flows. In addition to reporting
these three items separately, their related tax effects should also be reported either with
the item with which they are associated or in the notes to the statement. Approximately
19% of U.S. companies reported one of these unusual items on their income statement
for a recent fiscal year.^6 By reporting such items separately, investors and other users
of the financial statements can consider such factors in assessing a business’s future in-
come and cash flows.EARNINGS PER COMMON SHARE
The amount of net income is often used by investors and creditors in evaluating a com-
pany’s profitability. However, net income by itself is difficult to use in comparing com-
panies of different sizes. Also, trends in net income may be difficult to evaluate, using
only net income, if there have been significant changes in a company’s stockholders’
equity. Thus, the profitability of companies is often expressed as earnings per share.
Earnings per common share (EPS), sometimes called basic earnings per share, is the net
income per share of common stock outstanding during a period.
Because of its importance, earnings per share is reported in the financial press and
by various investor services, such as Moody’sandStandard & Poor’s. Changes in
earnings per share can lead to significant changes in the price of a corporation’s stock
in the marketplace. For example, the stock of eBay Inc.fell by over 19% to $83.33 per
share after the company announced earnings per share of 33¢ as compared to Wall
Street analysts’ estimate of 34¢ per share.542 Chapter 12 Special Income and Investment Reporting Issues
6 Determined from U.S. firms in excess of $5 billion sales on Thomson Research®database.Winner-Take-All Emphasis
HOW BUSINESSES MAKE MONEY
In the winner-take-all emphasis, the business that is
first able to achieve significant size can often drive
out competition and, thus, dominate the market.
Success breeds even more success. This emphasis is
most effective with businesses that offer a product
or service that gains value through use within a
community of networked customers. One example
isMicrosoft’s office productivity software. Products
like Word®gain value because users can swapfiles with each other. This feature reduces rival word
processing software from gaining a competitive
foothold.eBay Inc.also uses this emphasis. eBay’s
network offers more goods, more sellers, and more
potential buyers than a start-up rival. Hence, in
every country that eBay enters, it tries to acquire or
establish initial market dominance knowing that
once it is established, rivals will be hard pressed to
compete.Prepare an income
statement reporting
earnings per share data.