Chapter 12
Using Accounting Information
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income of a corporation, net of dividends. It is important not to confuse retained earnings with
cash or other assets within the business. The retained earnings account is presented in the equity
section of the balance sheet. The retained earnings section for the Proctor & Gamble Company is
highlighted in Figure 12.1.
OWNER’S CAPITAL
OWNER’S DRAWINGS
RETAINED EARNINGS
Increase
Increase
Increase
Owner’s Equity
Shareholders’ Equity
Decrease
Decrease
COMMON SHARES
Increase
Decrease
Decrease
PREFERRED SHARES
Increase
Decrease
_______________
Figure 12.2
Figure 12.2 illustrates the primary differences between the equity sections for a sole proprietorship
and a corporation. Notice the separation of the share types for a corporation.
We have identified some key differences between a corporation’s and sole proprietorship’s respective
balance sheets. In addition to share capital and retained earnings on the balance sheet, there are
terms that corporations commonly use on the income statement that are not usually seen in a sole
proprietorship’s income statement.These are discussed in the following section.
Reading the Income Statement
The income statement is a summary of how profits or losses were generated during an accounting
period. Once again, the presentation of corporations’ income statements is similar to that of sole
proprietorships’, but there are some new terms that will be explained in this section. The income
statement is also called “statement of income,” “statement of earnings,”or “statement of operations.”
Consider P&G’s 2014 Consolidated Statement of Earnings shown in Figure 12.3. This is similar to
the multistep income statement you have already encountered. Recall that in a sole proprietorship’s
multistep income statement, the earnings are subdivided into gross profit, operating income and net
income. A corporation’s multistep income statement follows the same basic idea. However, due to
the more complicated nature of the corporation’s operations, its income statement is more complicated
and lists more items. For example, a corporation that has multiple operating segments may decide to
discontinue an unprofitable segment.The earnings from this discontinued segment have to be reported
as a separate item from the earnings from the continuing segments.
