Multiple Changes Stumpville Products Corporation recently issued a press release stating that its net income for 2001 was $465,000 and earnings per share was $3.10.

These amounts reflect a significant improvement from 2000 when reported net income was $300,000 and earnings per share was $2.00. Because you have thought of purchasing some shares of Stumpville, you read the remainder of the press release carefully and note the following:

1. In 2000, Stumpville correctly reported an extraordinary loss of $40,000 on the early retirement of bonds.
2. A $30,000 gain was recorded in 2001 as a result of a recovery from the insurance company for fire damage to buildings in 2000. A loss on the fire in the amount of $65,000 was reported in 2000.
3. Stumpville switched from double-declining-balance depreciation to straight-line depreciation on equipment at the beginning of 2001. A positive cumulative adjustment of $60,000 was recorded at the time of the switch. Depreciation expense was $10,000 less in 2001 using straight-line depreciation than if double-declining balance had still been used. Depreciation expense in 2000 would have been $14,000 less than reported if straight-line depreciation had been used then.
4. Stumpville charged to expense the full $60,000 premium on a 3-year liability insurance policy when purchased on January 1, 2000.
5. An extraordinary loss of $28,000 was reported in 2001 from earthquake damage to production facilities in central Ohio.
6. The president’s salary was increased by $22,000 per year at the beginning of 2001.
Required:

a. Analyze each of the above items to determine the effect, if any, that each should have on 2000 and 2001 reported net income. Ignore any tax effects.

b. Compare the amounts of income reported for the 2 years and evaluate the accuracy of the press release. Did earnings really improve? By how much? What earnings figures are most useful to you as a potential investor?
Explain. Make your comparison using these figures.