GLOSSARY
556 Chapter 12 Special Income and Investment Reporting Issues
different from the one used previously for reporting pur-
poses. The effect of the change in principle on net income in
the current period, as well as the cumulative effect on in-
come of prior periods, should be disclosed in the financial
statements, net of tax, below income from continuing
operations.Prepare an income statement reporting earnings per
share data. Earnings per share is reported on the in-
come statements of public corporations. If there are unusual
items below income from continuing operations on the in-
come statement, the per-share amount should be presented
for each of these items as well as net income.Describe the accounting for investments in stocks.
A business may purchase stocks as a means of earning
a return (income) on excess cash that it does not need for its
normal operations. Such investments are recorded in a mar-
ketable securities account. Their cost includes all amounts
spent to acquire the securities. Any dividends received on
an investment are recorded as a debit to Cash and a credit
to Dividend Revenue. On the balance sheet, temporary
investments are reported as available-for-sale securities at
their fair market values. Any difference between the fair
market values of the securities and their cost is an unreal-
ized holding gain or loss (net of applicable taxes) that is
reported as an other comprehensive income item.
Long-term investments in stocks are not intended as a
source of cash in the normal operations of the business.
They are reported in the balance sheet either as available-
for-sale securities, and disclosed at fair value, or reported
under the equity method if the investor has significant influ-
ence over the investee.
The accounting for the sale of stock is the same for both
short- and long-term investments. The investment account isAvailable-for-sale securitiesSecurities that management
expects to sell in the future but which are not actively traded
for profit.Consolidated financial statementsFinancial state-
ments resulting from combining parent and subsidiary
statements.Discontinued operationsOperations of a major line of
business or component for a company, such as a division, adepartment, or a certain class of customer, that have been dis-
posed of.Earnings per common share (EPS)Net income per share
of common stock outstanding during a period.Equity methodA method of accounting for an investment
in common stock by which the investment account is adjusted
for the investor’s share of periodic net income and cash divi-
dends of the investee.credited for the carrying amount (book value) of the
shares sold, the cash or receivables account is debited for
the proceeds, and any difference between the proceeds and
the carrying amount is recorded as a gain or loss on the
sale.Record entries for the purchase, interest, discount and
premium amortization, and sale of bond investments.
A long-term investment in bonds is recorded by debiting
Investment in Bonds. When bonds are purchased between
interest dates, the amount of the interest paid should be
debited to Interest Revenue. Any discount or premium on
bond investments should be amortized, using the straight-
line method. The amortization of a discount is recorded by
debiting Investment in Bonds and crediting Interest
Revenue. The amortization of a premium is recorded by
debiting Interest Revenue and crediting Investment in
Bonds.
When bonds held as long-term investments are sold,
any discount or premium for the current period should first
be amortized. Cash is then debited for the proceeds of the
sale, Investment in Bonds is credited for its balance, and any
gain or loss is recorded.Compute and interpret the price-earnings and price-
book ratios. The assessment of a firm’s expected earn-
ings growth is indicated by the price-earnings ratio, or P/E
ratio. It is computed by dividing the stock’s market price
per share at a specific date by the company’s annual earn-
ings per share. The price-book ratio compares the market
value of a share of common stock to the book value of a
share of common stock. This ratio measures the degree to
which the market value exceeds the net assets valued under
historical cost principles.