Question 1

Why might a company repurchase its own stock?

Accepted Answer

A)  It believes that the market undervalues its shares 
B)  To offset dilutive effects of employee stock options granted 
C)  To recognize an economic gain when the treasury shares are later sold for a profit 
D)  To improve earnings per share by reducing the denominator 
E)  All of the above 
A)  It believes that the market undervalues its shares 
B)  To offset dilutive effects of employee stock options granted 
C)  To recognize an economic gain when the treasury shares are later sold for a profit 
D)  To improve earnings per share by reducing the denominator 
E)  All of the above E

Question 2

Josette Dupress, a sagacious investor, prefers the stock of a company with a higher ratio of retained earnings to contributed capital (common stock plus paid-in capital). The ratio should preferably be above 2.0, in Josette 's opinion. She finds Collins Corporation acceptable because the equity breakdown at year-end is as follows:
Common stock, par $1 $51,900
Additional paid-in capital $99,750
Retained Earnings $336,000
The financial statement footnotes of Collins Corp. reveal that the company paid a stock dividend on the last day of the fiscal year. Specifically, the firm declared a stock dividend equivalent to 25% of the (then) outstanding shares and recorded the transaction as a large stock dividend. Assume that the stock price was $12 per share on the date the stock dividend was recorded.
Required:
a. Calculate the ratio that Josette Dupress is interested in, using the year-end numbers, above.
b. Prepare the shareholders' equity for Collins Corp. showing the balances immediately before the company recorded the large stock dividend. Recalculate the ratio that Josette Dupress is interested in, using the numbers before the stock dividend.
c. Did Collins Corporation account for the dividend properly as a large stock dividend?
d. Prepare a pro forma statement of shareholders' equity treating the stock dividend as a small stock dividend. Recalculate the ratio that Josette Dupress is interested in, using these pro forma numbers.
e. What advice would you give Josette Dupress?

Accepted Answer

a. Using the year-end numbers, the ratio is $336,000 / ($51,900 + $99,750) = 2.22.
b. After the dividend there are $51,900 / $1 par = 51,900 common shares outstanding. The dividend was 25% of common shares. Therefore there were 41,520 common shares issued before the dividend (51,900 / 1.25 = 41,520 shares). With a large stock dividend, the par value of the 10,380 shares granted as a dividend, is transferred from retained earnings to common stock. Stockholders' equity before the dividend was:
Common stock, par $1 $41,520
Additional paid-in capital $99,750
Retained Earnings $346,380
Ratio was: $346,380 / ($41,520 + $99,750) = 2.45
c. Yes, Collins Corporation accounted for the dividend properly. However, Collins could have accounted for this as a small stock dividend because 25% is between 20% and 25%, the breakpoint of the two categories.
d. With a small stock dividend, the market value of the 10,380 shares granted as a dividend, is transferred from retained earnings to common stock and APIC. The market value was $12, so retained earnings would be reduced by $124,560 ($12 × 10,380 = $124,560). Common stock would be increased by the par value of $10,380, and the remaining $114,180 would be added to additional paid-in capital, Stockholders' equity after the dividend would be:
Common stock, par $1 $51,900
Additional paid-in capital $213,930
Retained earnings $221,820
Using these pro forma numbers, the adjusted ratio is $221,820 / ($51,900 + $213,930) = 0.83
e. Josette Dupress should consider using a different ratio to assess investments. The ratio of earned to contributed capital can be informative but is affected drastically by the way the company accounts for stock dividends. There is no economic difference when stock dividends are issued so Josette Dupress should not use a ratio that indicates that there are differences.

Question 3

A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.

Accepted Answer

A) True 
 B)False  True

Question 4

A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.

Accepted Answer

A) True 
 B)False

Question 5

On September 20, 2017, Umatilla Company announced a 4 for 1 stock split. After the split, the company will have about 24.6 million shares outstanding. Shares traded for about $375 a share the day the split was announced.
a. What is a 4 for 1 stock split?
b. Why do companies like Umatilla Company split their stock?
c. How many shares were outstanding when the stock split was announced?
d. How will the equity section of the balance sheet be affected by this stock split?

Accepted Answer

a. A 4 for 1 stock split means the compa

Question 6

Riverton, Inc. declares a small stock dividend of 8.0% of the outstanding shares of common stock. Currently, Riverton, Inc. has 1,500,000 shares of $1 par value common stock outstanding. The current market price of the stock is $121.28 per share.
Riverton Partners will record a stock dividend in the amount of:

Accepted Answer

A)  $ 1,300,000 
B)  $98,540,000 
C)  $13,613,600 
D)  $14,553,600 
E)  None of the above 
A)  $ 1,300,000 
B)  $98,540,000 
C)  $13,613,600 
D)  $14,553,600 
E)  None of the above

Question 7

Miller Corp. reported the following in its 2016 10K report:
In September 2012, the Company sold $330,000,000 of its 4.75% variable interest senior convertible debentures due 2032 in a private offering to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933…The debentures are convertible into the Company's common stock at the holder's option. The conversion price at December 31, 2016 was $32.00 per share (31.25 shares of common stock per $1,000 principal amount of the note), is subject to adjustment for various events, including the issuance of stock dividends.
The company's December 31, 2016, balance sheet reports the following:
   If all of the convertible debentures were converted to common stock on January 1, 2017, what would the common stock and additional paid-in capital account totals be?

Accepted Answer

The debentures total $330,000,000. At a

Question 8

Oil Services Corp. reports the following EPS data in its 2017 annual report (in million except per share data).
  How many weighted average shares were dilutive in 2017?

Accepted Answer

A)  1,172 million 
B)  10 million 
C)  14 million 
D)  1,186 million 
E)  None of the above 
A)  1,172 million 
B)  10 million 
C)  14 million 
D)  1,186 million 
E)  None of the above

Question 9

A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments.

Accepted Answer

A) True 
 B)False

Question 10

The SEC requires that firms report both basic and diluted earnings per share in their 10-K reports. Why do firms' basic EPS and diluted EPS differ? Which EPS number is more informative to you as an investor?

Accepted Answer

Basic earnings per share is defined as n

Question 11

What are some of the benefits received from being a preferred stockholder vs. a common stock holder?

Accepted Answer

Dividend Preference: Preferred sharehold

Question 12

Thermopolis, Inc. reported retained earnings of $490,953 on December 31, 2017. During the year, Thermopolis recorded net income of $135,075 and paid dividends of $57,762. The company had no other transactions that affected retained earnings.
What must retained earnings have been on December 31, 2016?

Accepted Answer

A)  $ 57,762 
B)  $237,250 
C)  $413,640 
D)  $478,842 
E)  None of the above 
A)  $ 57,762 
B)  $237,250 
C)  $413,640 
D)  $478,842 
E)  None of the above

Question 13

If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

Accepted Answer

A)  Increase cash by $120,000 and increase contributed capital by $120,000 
B)  Increase cash by $120,000 and increase earned capital by $120,000 
C)  Increase stock revenues by $120,000 
D)  Stock issuances are not reported on the balance sheet 
E)  None of the above 
A)  Increase cash by $120,000 and increase contributed capital by $120,000 
B)  Increase cash by $120,000 and increase earned capital by $120,000 
C)  Increase stock revenues by $120,000 
D)  Stock issuances are not reported on the balance sheet 
E)  None of the above

Question 14

Oracle Corporation reported the following earnings per share information in its 2016 Form 10-K. The company has only one class of stock outstanding. ($ in millions)
  Basic and diluted earnings per share were, respectively:

Accepted Answer

A)  $0.30 and $0.30 
B)  $0.77 and $0.74 
C)  $1.08 and $1.06 
D)  $2.11 and $2.07 
E)  None of the above 
A)  $0.30 and $0.30 
B)  $0.77 and $0.74 
C)  $1.08 and $1.06 
D)  $2.11 and $2.07 
E)  None of the above

Question 15

Cisco Systems Inc. reported the following in its income statement for the year ended July 30, 2016: Basic earnings per share of $2.13 and diluted earnings per share of $2.11. There were 5,053 million weighted average basic shares were outstanding during the year.
What approximate net income, did the company report for 2016?

Accepted Answer

A)  $ 7,624 million 
B)  $10,662 million 
C)  $10,763 million 
D)  $ 4,310 million 
E)  None of the above 
A)  $ 7,624 million 
B)  $10,662 million 
C)  $10,763 million 
D)  $ 4,310 million 
E)  None of the above

Question 16

In 2017, Macy's paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.

Accepted Answer

A) True 
 B)False

Question 17

On September 1, 2017, Hood River, Inc. announced a 3-for-2 stock split, in the form of a dividend, to be distributed on September 30, 2017, to stockholders of record on September 12, 2017.
a. What is a 3-for-2 stock split?
b. How will Hood River , Inc. balance sheet be affected by this split?

Accepted Answer

a. A 3-for-2 stock split means the compa

Question 18

Sketchers U.S.A., Inc. reports the following in its 2016 Form 10-K (in thousands). Use the information to calculate basic and diluted earnings per share (EPS) numbers from continuing operations.

Accepted Answer

Basic EPS: $243,493

Question 19

Stockholders' equity is not accounted for at current fair value.

Accepted Answer

A) True 
 B)False

Question 20

3 Following is the stockholders' equity section of the Spirit Airlines, Inc. 2016 balance sheet ($ in thousands):
   Required:
a. Spirit has 240 million shares of common stock authorized, but only 73,549,872 shares issued. Why is there a difference between these two numbers?
b. Verify that Spirit's common stock balance is $7 thousand.
c. How many common shares did Spirit have outstanding at the end of the year? 
d. Calculate the average cost at which Spirit repurchased its common stock.

Accepted Answer

a. The number of shares authorized is fo

Why might a company repurchase its own stock?

A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.

A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.

Oil Services Corp. reports the following EPS data in its 2017 annual report (in million except per share data). How many weighted average shares were dilutive in 2017?

A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments.

The SEC requires that firms report both basic and diluted earnings per share in their 10-K reports. Why do firms' basic EPS and diluted EPS differ? Which EPS number is more informative to you as an investor?

What are some of the benefits received from being a preferred stockholder vs. a common stock holder?

If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

Oracle Corporation reported the following earnings per share information in its 2016 Form 10-K. The company has only one class of stock outstanding. ($ in millions) Basic and diluted earnings per share were, respectively:

In 2017, Macy's paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.

On September 1, 2017, Hood River, Inc. announced a 3-for-2 stock split, in the form of a dividend, to be distributed on September 30, 2017, to stockholders of record on September 12, 2017. a. What is a 3-for-2 stock split? b. How will Hood River , Inc. balance sheet be affected by this split?

Sketchers U.S.A., Inc. reports the following in its 2016 Form 10-K (in thousands). Use the information to calculate basic and diluted earnings per share (EPS) numbers from continuing operations.

Stockholders' equity is not accounted for at current fair value.

Financial Accounting for MBAS

Introducing Financial Statements

Transactions, Adjustments, and Financial Statements

Analyzing and Interpreting Financial Statements

Revenues, Receivables, and Operating Expenses

Inventory, Accounts Payable, and Long-Term Assets

Current Liabilities and Long-Term Liabilities

Intercorporate Investments

Leases, Pensions, and Income Taxes

Cash Flows

Forecasting Financial Statements

Using Financial Statements for Valuation

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Exam 8: Stock Transactions, Dividends, and EPS

Why might a company repurchase its own stock?

A company with outstanding in-the money employee stock options will report a diluted EPS that is lower than basic EPS.

A company is worse off by paying cash dividends because it must record a loss for this transaction in its income statement.

Oil Services Corp. reports the following EPS data in its 2017 annual report (in million except per share data). How many weighted average shares were dilutive in 2017?

A stock split is a monetary transaction. Consequently, a company that splits its stock must make several financial statement adjustments.

The SEC requires that firms report both basic and diluted earnings per share in their 10-K reports. Why do firms' basic EPS and diluted EPS differ? Which EPS number is more informative to you as an investor?

What are some of the benefits received from being a preferred stockholder vs. a common stock holder?

If a company issues 2,500 shares of common stock at a market price of $48 per share, which of the following is the correct balance sheet effect?

Oracle Corporation reported the following earnings per share information in its 2016 Form 10-K. The company has only one class of stock outstanding. ($ in millions) Basic and diluted earnings per share were, respectively:

In 2017, Macy's paid $459 million of cash dividends. These dividends reduced assets and reduced retained earnings.

On September 1, 2017, Hood River, Inc. announced a 3-for-2 stock split, in the form of a dividend, to be distributed on September 30, 2017, to stockholders of record on September 12, 2017. a. What is a 3-for-2 stock split? b. How will Hood River , Inc. balance sheet be affected by this split?

Sketchers U.S.A., Inc. reports the following in its 2016 Form 10-K (in thousands). Use the information to calculate basic and diluted earnings per share (EPS) numbers from continuing operations.

Stockholders' equity is not accounted for at current fair value.

Financial Accounting for MBAS

Introducing Financial Statements

Transactions, Adjustments, and Financial Statements

Analyzing and Interpreting Financial Statements

Revenues, Receivables, and Operating Expenses

Inventory, Accounts Payable, and Long-Term Assets

Current Liabilities and Long-Term Liabilities

Intercorporate Investments

Leases, Pensions, and Income Taxes

Cash Flows

Forecasting Financial Statements

Using Financial Statements for Valuation

Filters