Deck 20: Earnings Per Share

Question 1

Retroactive application of stock splits and stock dividends to the weighted-average number of common shares makes EPS comparable for prior and current periods of one entity.

Answer 1

True

Question 2

Which one of the following items is not a way for management to influence EPS computations to meet target goals?

A) measurements of impairments on plant, property and equipment
B) determination of tax contingencies
C) recording the sale of merchandise on account
D) choice of inventory cost flow assumptions

Answer 2

C

Question 3

A company may show EPS information either on the Income Statement or in the Notes to Financial Statements, whichever it prefers.

Answer 3

False

Question 4

Hudson Motors reported $735,000 net income for the current year. Beginning common shares outstanding were 120,000. Hudson also had 10,000, 6% nonconvertible, cumulative, $100 par value preferred shares outstanding for the entire year. No cash dividends were declared. Compute basic earnings per share. (Round your answer to the nearest cent.)

A) $6.13
B) $6.12
C) $5.63
D) $5.19

Question 5

For share issuances that occur before a stock split or dividend, the retroactive assumption assumes that the split or dividend occurred at the time of the issuance.

Question 6

George Manufacturing had net income of $275,000 and declared preferred dividends of $20,000 during the current year. George began the year with 16,000 common shares outstanding. It issued 60,000 shares on June 30 and repurchased 12,000 of the newly issued shares on November 1. Compute George's weighted-average common shares outstanding for the year.

A) 64,000
B) 44,000
C) 74,000
D) 76,000

Question 7

Earnings per share is the most often quoted financial statistic in the business media.

Question 8

When computing basic EPS, the numerator includes net income minus the ________.

A) present value of stock options
B) current year preferred dividends paid and current year preferred dividends in arrears
C) cost of interest paid on bonds, net of tax
D) cash paid for dividends during the year

Question 9

The retroactive assumption for stock splits and stock dividends assumes that all splits and stock dividends occur at the beginning of the year, if the stock is outstanding at the beginning of the year. The retroactive assumption is also retroactive to ________.

A) the prior year
B) all prior years
C) the date of issue of the common shares
D) the past five years reported in the current annual report

Question 10

When a stock split or stock dividend occurs during the year, it is retroactive to the beginning of the year, if the common shares were outstanding as of the beginning of the year.

Question 11

When companies release EPS information, it does not influence stock prices.

Question 12

The retroactive assumption for stock dividends and splits helps financial statement users to ________.

A) recompute their net worth in the company
B) be assured that management is effective
C) hold management accountable for poor timing in the decision
D) compare the company's EPS changes over time

Question 13

George Manufacturing had net income of $150,000 and declared preferred dividends of $10,000 during the current year. George began the year with 11,000 common shares outstanding. It issued 60,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1. Compute George's basic EPS for the year. (Round your answer to the nearest cent.)

A) $3.75
B) $12.73
C) $3.50
D) $3.41

Question 14

Edmond Biometrics reported net income of $200,000 for both last year and the current year. The shares outstanding for the prior year were 100,000 shares for the whole year. On December 1 of the current year, Edmond declared a two for one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2. (Round your answer to the nearest cent.)

A) Year 1 $2.00; Year 2 $1.00
B) Year 1 $1.00; Year 2 $1.00
C) Year 1 $2.00; Year 2 $1.33
D) Year 1 $2.00; Year 2 $0.80

Question 15

The denominator for basic EPS is based on the weighted-average number of common shares outstanding during the year.

Question 16

The numerator for basic EPS is net income less preferred dividend requirements.

Question 17

Basic EPS measures the earnings available to common shareholders based on the weighted-average number of common shares outstanding during the period.

Question 18

The denominator of the basic EPS equation contains the ________.

A) weighted-average number of shares of common stock outstanding for the year
B) number of shares of common stock outstanding at the end of the year
C) largest number of common shares outstanding during the year
D) total of common and preferred shares outstanding during the year

Question 19

Charlotte Engineering reported net income of $400,000 for the year. It declared $30,000 in preferred dividends on December 23. It began the year with 100,000 common shares outstanding. On July 1, Charlotte declared a 5% common stock dividend. Compute the basic EPS for the year. (Round your answer to the nearest cent.)

A) $3.52
B) $3.70
C) $3.89
D) $3.61

Question 20

Charlotte Engineering had net income of $450,000 for the year. It declared $30,000 in preferred dividends on December 23. It began the year with 600,000 common shares outstanding. On July 1, Charlotte declared a 10% common stock dividend. Compute the weighted-average common shares outstanding for the year.

A) 600,000
B) 540,000
C) 660,000
D) 720,000

Question 21

Stock options and stock warrants affect only the denominator of the diluted EPS calculation.

Question 22

Jenks Corp. began the year with 200,000 shares of common stock and 30,000 shares of 7%, $100 par value, cumulative, nonconvertible preferred stock. On March 1 it declared a 5% stock dividend on common shares. On June 30, it purchased 10,000 shares of treasury stock. On October 1, Jenks declared a 2 for 1 stock split. Net income for the year was $650,000. Compute weighted average shares of common stock for the year and basic EPS.
Instructions: Write the EPS formula. Show all computations used in your solution.

Question 23

Stock options and warrants differ from convertible debt and convertible preferred stock in that they generally provide cash to the issuing entity.

Question 24

Greenwell Coffee Company began operations on the first day of the year. On that day they issued 100,000 shares. On March 1 they issued 23,000 shares and on July 1, another 30,000 shares. On December 1, Greenwell repurchased 6,000 shares of outstanding shares. Compute the weighted-average shares of stock for the first year of operation. (Round your final answer to the nearest whole number.)

A) 147,000
B) 134,667
C) 133,667
D) 134,167

Question 25

When computing diluted EPS, convertible preferred stock issued during the year are treated as if they were issued on the first day of the year.

Question 26

Why does the numerator of the basic EPS formula subtract the amount of preferred dividends for some preferred shares and not for others?

Question 27

Sumner Industries began the year with 140,000 shares of common stock and 10,000 shares of 6%, $100 par value, cumulative, nonconvertible preferred stock. On April 1 it declared a 10% stock dividend on common shares. On June 1, it purchased 15,000 shares of treasury stock. On December 1, Sumner declared a 2 for 1 stock split. Net income for the year was $570,000. Compute weighted average shares of common stock for the year and basic EPS.
Instructions: Write the EPS formula. Show all computations used in your solution.

Question 28

Interurban Company began operations on the first day of the year. On that day they issued 90,000 shares. On March 1 they issued 60,000 shares and on July 1, another 20,000 shares. On December 1, Interurban repurchased 6,000 shares of outstanding shares. Compute basic EPS for the first year of operation if net income was $100,000. (Round number of shares to the nearest whole number, and your final answer to the nearest cent.)

Question 29

Robertson Corporation reported net income for Year 1 of $220,000 and Year 2 of $340,000. The weighted-average common shares outstanding 140,000 in Year 1 and 130,000 in Year 2. Robertson also has 10,000 shares of $100 par value, cumulative, 5% preferred stock outstanding in both years. Dividends were not declared in Year 1, but both years' dividends were declared and paid in Year 2. Compute EPS for both years. (Round your answers to the nearest cent.)

A) Year 1, $1.21; Year 2, $1.21
B) Year 1, $1.21; Year 2, $2.23
C) Year 1, $1.21; Year 2, $2.62
D) Year 1, $1.57; Year 2, $2.62

Question 30

When applying the if-converted assumption, the company assumes conversion at the beginning of the year for a convertible bond or convertible preferred stock outstanding at the beginning of the year.

Question 31

Hornet Motors reported $535,000 net income for the current year. Beginning common shares outstanding were 110,000. Hudson also had 10,000, 6% nonconvertible, cumulative, $100 par value preferred shares outstanding for the entire year. No cash dividends were declared but Hornet did declare and distribute a 10% stock dividend on common shares on July 1. Compute basic earnings per share. (Round your answer to the nearest cent.)

A) $4.92
B) $4.42
C) $4.32
D) $3.93

Question 32

If convertible debt is issued during the year, the total interest expense for the entire year must be added to the numerator of the diluted EPS calculation.

Question 33

A complex capital would include only convertible debt and convertible preferred stock.

Question 34

Basic EPS must be computed before diluted earnings per share can be properly computed.

Question 35

A simple capital structure contains no potentially dilutive securities.

Question 36

Robertson Corporation reported net income for Year 1 of $200,000 and Year 2 of $400,000. The weighted-average common shares outstanding 330,000 in Year 1 and 120,000 in Year 2. Robertson also has 10,000 shares of $100 par value, cumulative, 5% preferred stock outstanding in both years. Dividends were not declared in Year 1, but both years' dividends were declared and paid in Year 2. Compute EPS for both years. (Round your answers to the nearest cent.)

Question 37

When applying the if-converted assumption, the company assumes conversion at the beginning of the year when a convertible bond or convertible preferred stock is issued during the year.

Question 38

Describe how managers can manipulate EPS to increase their compensation and give at least three examples.

Question 39

Interurban Company began operations on the first day of the year. On that day they issued 90,000 shares. On March 1 they issued 60,000 shares and on July 1, another 20,000 shares. On December 1, Interurban repurchased 6000 shares of outstanding shares. Compute basic EPS for the first year of operation if net income was $100,000. (Round number of shares to the nearest whole number, and your final answer to the nearest cent.)

A) $1.11
B) $0.67
C) $1.67
D) $0.80

Question 40

Convertible securities in a capital structure may require the adjustment of both the numerator and denominator of the basic EPS formula.

Question 41

Austin Products reported $340,000 net income for the year with 100,000 common shares outstanding all year. Austin issued 26,000 shares of $100, 8% convertible preferred shares on March 1. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS. (Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

A) basic EPS $305,333; diluted EPS $166,667
B) basic EPS $305,333; diluted EPS $132,000
C) basic EPS $340,000; diluted EPS $340,000
D) basic EPS $166,667; diluted EPS $340,000

Question 42

McManus Inc. reported net earnings of $800,000 for the year. McManus has 200,000 shares of common stock outstanding all year. On March 31, the company granted 40,000 stock options that allow employees to purchase 40,000 shares for $15 each. The company stock has averaged $20 in the market during the year. Compute the basic and diluted EPS.

A) basic EPS $4.00; diluted EPS $3.81
B) basic EPS $4.00; diluted EPS $4.00
C) basic EPS $4.00; diluted EPS $3.86
D) basic EPS $3.86; diluted EPS $3.86

Question 43

Terrell Foods reported $870,000 in net income and its weighted average shares outstanding for the year is 200,000 shares. In prior years it sold $1,500,000 of 8% long-term convertible bonds at par which are still outstanding. The bonds are convertible into 10,000 shares of common stock. The tax rate for all years is 40%. If Terrell has no other potentially dilutive securities and no preferred stock, and no conversions occur during the year, what are basic and diluted EPS? (Round your final answers to the nearest cent.)

A) basic EPS $4.35; diluted EPS $4.49
B) basic EPS $4.14; diluted EPS $4.49
C) basic EPS $4.35; diluted EPS $4.71
D) basic EPS $4.14; diluted EPS $4.71

Question 44

Austin Products reported $330,000 net income for the year with 100,000 common shares outstanding all year. Austin also had 24,000 shares of $100, 8% convertible preferred shares outstanding all year. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

A) basic EPS $192,000; diluted EPS $138,000
B) basic EPS $138,000; diluted EPS $330,000
C) basic EPS $138,000; diluted EPS $468,000
D) basic EPS $330,000; diluted EPS $330,000

Question 45

Austin Products reported $400,000 net income for the year with 100,000 common shares outstanding all year. Austin also had 60,000 shares of $100, 8% convertible preferred shares outstanding all year. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

A) basic EPS $400,000 - (60,000 × $100 × 8%); diluted EPS $400,000 - (60,000 × $100 × 8%)
B) basic EPS $400,000 - (60,000 × $100 × 8%); diluted EPS $400,000
C) basic EPS $400,000 - (60,000 × $100 × 8%); diluted EPS $400,000 + (60,000 × $100 × 8%)
D) basic EPS $400,000; diluted EPS $400,000

Question 46

Terrell Foods reported $680,000 in net income (not considering interest expense) and its weighted-average shares outstanding for the year is 100,000 shares. In prior years it sold $1,500,000 of 8% long-term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into 40,000 shares of common stock. The tax rate for all years is 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred stock, what is the denominator for basic and diluted EPS?

A) basic 120,000; diluted 140,000
B) basic 100,000; diluted 140,000
C) basic 140,000; diluted 140,000
D) basic 100,000; diluted 120,000

Question 47

Terrell Foods reported $820,000 in net income (not considering interest expense) and its weighted-average shares outstanding for the year is 200,000 shares. In prior years it sold $1,000,000 of 8% long-term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into 40,000 shares of common stock. The tax rate for all years is 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred stock, what is the numerator for basic and diluted EPS? (Round your final answers to the nearest cent.)

A) basic $796,000.00; diluted $820,000.00
B) basic $820,000.00; diluted $796,000.00
C) basic $844,000.00; diluted $844,000.00
D) basic $796,000.00; diluted $844,000.00

Question 48

Pennock Inc. has convertible preferred stock outstanding. To compute the diluted EPS, it must adjust ________.

A) only the numerator
B) only the denominator
C) both the numerator and denominator
D) neither the numerator nor the denominator

Question 49

A company with convertible bonds outstanding will need to adjust the denominator of the diluted EPS equation. If the bonds are outstanding all year, the adjustment will consist of the ________.

A) number of bonds in the debt issue
B) conversion ratio times the number of bonds outstanding net of taxes
C) conversion ratio times the number of bonds outstanding
D) number of bonds issued during the current year

Question 50

Austin Products reported $330,000 net income for the year with 100,000 common shares outstanding all year. Austin issued 20,000 shares of $100, 8% convertible preferred shares on March 1. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

A) basic EPS $330,000 - [(20,000 × $100 × 8%) (2/12)]; diluted EPS $330,000
B) basic EPS $330,000 - [(20,000 × $100 × 8%) (2/12)]; diluted EPS $330,000 - (20,000 × $100 × 8%)
C) basic EPS $330,000; diluted EPS $330,000
D) basic EPS $330,000 - [(20,000 × $100 × 8%) (10/12)]; diluted EPS $330,000

Question 51

Harvey Inc. reported net earnings of $700,000 for the year. Harvey has 200,000 shares of common stock outstanding all year. Two years ago, the company granted 20,000 stock options that allow employees to purchase 20,000 shares for $15 each. The company stock has averaged $20 in the market during the year. Compute the basic and diluted EPS.

A) basic EPS $3.50; diluted EPS $3.41
B) basic EPS $3.50; diluted EPS $3.50
C) basic EPS $3.41; diluted EPS $3.41
D) basic EPS $3.50; diluted EPS $2.34

Question 52

A company with convertible bonds outstanding will assume hypothetical conversion at the earliest point of the year to compute diluted EPS. The numerator is ________.

A) increased by the interest paid on the bonds during the fiscal year
B) increased by the after-tax interest expense on the bonds for the fiscal year
C) decreased by the interest paid on the bonds during the fiscal year
D) decreased by the after-tax interest paid on the bonds during the fiscal year

Question 53

Stock options and warrants affect the diluted EPS calculation by changing the ________.

A) numerator only
B) denominator only
C) both the numerator and denominator
D) neither the numerator and denominator

Question 54

When applying the if-converted assumption for potentially dilutive securities, conversions are assumed to occur at the ________.

A) end of the prior year for hypothetical conversions
B) beginning of the year for hypothetical conversions
C) middle of the current year for actual conversions
D) beginning of the current year or on the issue date of the dilutive security if issued during the current year

Question 55

Smith Instruments reported $6,000,000 in net income for the current year. The company had $500,000 of 10% cumulative, non-convertible preferred stock outstanding all year, and issued $5,000,000 of 6% convertible bonds on June 1. Each $1,000 bond is convertible into 40 shares of common stock. 400,000 common shares were outstanding all year. Determine the denominator for both basic and diluted EPS when the tax rate is 40%.

A) basic EPS 400,000; diluted EPS 400,000 + (5,000 × 40) (5/12)
B) basic EPS 400,000 (7/12); diluted EPS 400,000 + (5,000 × 40) (7/12)
C) basic EPS 400,000; diluted EPS 400,000 + (5,000 × 40) (7/12)
D) basic EPS 400,000 (5/12); diluted EPS [400,000 + (5,000 × 40)] (5/12)

Question 56

Terrell Foods reported $910,000 in net income (not considering interest expense) and its weighted-average shares outstanding for the year is 100,000 shares. In prior years it sold $1,500,000 of 8% long-term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into 50,000 shares of common stock. The tax rate for all years is 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred stock, what are basic and diluted EPS? (Round your final answers to the nearest cent.)

A) basic EPS $6.99 diluted EPS $6.07
B) basic EPS $5.83 diluted EPS $6.99
C) basic EPS $6.07 diluted EPS $5.83
D) basic EPS $5.83 diluted EPS $5.83

Question 57

Which one of the following does not require the computation of diluted earnings per share?

A) convertible bonds
B) stock warrants
C) preferred stock
D) stock options

Question 58

U.S. GAAP assumes that all potential dilutive shares in diluted earnings per share computations use the treasury stock method.

Question 59

Baker Instruments reported $7,000,000 in net income for the current year. The company had $500,000 of 10% cumulative, non-convertible preferred stock outstanding all year, and issued $1,000,000 of 6% convertible bonds on June 1. Determine the numerator for both basic and diluted EPS when the tax rate is 40%.

A) basic EPS $7,000,000 - $50,000; diluted EPS $7,000,000 - $50,000 + ($60,000 × 5/12)(1 - .40)
B) basic EPS $7,000,000 - $50,000; diluted EPS $7,000,000 - $50,000 + ($60,000 × 7/12)(1 - .40)
C) basic EPS $7,000,000 - $50,000 (7/12); diluted EPS $7,000,000 - $50,000 (7/12) + ($60,000 × 7/12)(1 - .40)
D) basic EPS $7,000,000 - $50,000 (5/12); diluted EPS $7,000,000 - $50,000 (5/12) + ($60,000 × 5/12)(1 - .40)

Question 60

Gray Corporation reported $500,000 in interest expense for the current year for bonds that were issued in prior years. Gray's tax rate is 40%. By what amount is the numerator of diluted EPS positively adjusted?

A) $0
B) $200,000
C) $300,000
D) $500,000

Question 61

Normally dilutive securities will become antidilutive if income from continuing operations is a net loss.

Question 62

Terrell Foods reported $950,000 in net income and its weighted average shares outstanding for the year is 200,000 shares. In prior years it sold $1,000,000 of 8% long-term convertible bonds at par which are still outstanding. The bonds are convertible into 20,000 shares of common stock. The tax rate for all years is 40%. If Terrell has no other potentially dilutive securities and no preferred stock, and no conversions occur during the year, what are basic and diluted EPS? (Round your final answers to the nearest cent.)

Question 63

When there are multiple dilutive securities in a firm, the antidilution test for the sequence should be from ________.

A) most dilutive to least dilutive
B) least dilutive to most dilutive
C) convertibles first and warrants last
D) convertibles debt first and options last

Question 64

Potentially dilutive securities should not be included in dilutive EPS computations when net income from continuing operations is negative.

Question 65

When computing diluted EPS, only the denominator is affected by ________.

A) warrants and options
B) convertible preferred stock
C) preferred stock
D) convertible bonds

Question 66

Lewis, Inc. began the year with 300,000 shares of common stock and 25,000 shares of 6%, $100 par value, cumulative, convertible preferred stock. Each share of preferred stock is convertible into 2 shares of common stock. On June 30, it purchased 10,000 shares of treasury stock. On November 1, Lewis declared a 2 for 1 stock split. Net income for the year was $850,000. Compute weighted average shares of common stock for the year, basic EPS, and diluted EPS.

Question 67

A security is antidilutive if decreases the diluted EPS below basic EPS.

Question 68

Medical Instruments reported $7,000,000 in net income for the current year. The company had $6,000,000 of 8% cumulative, non-convertible preferred stock outstanding all year, and issued $10,000,000 of 7% convertible bonds on July 1. Each $1,000 bond is convertible into 30 shares of common stock. Common shares outstanding at the beginning of the year was 1,000,000, but on December 15, the company declared a 2 for 1 stock split. Compute both basic and diluted EPS when the tax rate is 40%.

Question 69

Kansas Instruments reported $7,000,000 in net income for the current year. The company had $7,000,000 of 9% cumulative, non-convertible preferred stock outstanding all year, and issued $5,000,000 of 7% convertible bonds on May 1. Each $1,000 bond is convertible into 40 shares of common stock. Common shares outstanding all year were 2,000,000. Compute both basic and diluted EPS when the tax rate is 40%.

Question 70

How does IFRS differ from GAAP with diluted earnings per share?

Question 71

Ozarka Products reported $9,500,000 in net income for the current year. The company had $5,000,000 of 7% cumulative, preferred stock outstanding all year, along with, $10,000,000 of 6% bonds. Each $1,000 bond had 4 detachable stock warrants and each warrant allowed the warrant holders to buy a share of stock for $60. The average share price for the year was $80. Common shares outstanding at the beginning of the year was 4,000,000, but on June 15, the company declared a 10% stock dividend. Compute both basic and diluted EPS when the tax rate is 40%.

Question 72

When options and warrants are in the money, they will be dilutive.

Question 73

Describe which potentially dilutive securities require after-tax adjustments to the numerator or denominator of the EPS formula.

Question 74

The treasury stock method is used when the organizational structure includes ________.

A) convertible preferred stock
B) convertible bonds
C) only stock options
D) stock options or warrants

Question 75

When must a firm use the treasury stock method for earnings per share calculations?

Question 76

When computing diluted EPS, both the numerator and denominator are affected by ________.

A) stock options
B) stock warrants
C) preferred stock
D) convertible bonds

Question 77

Antidilutive securities are excluded from the diluted EPS equation.

Question 78

When a potentially dilutive security is present, a company must test the security to see if it is dilutive or antidilutive. Antidilutive securities occur when diluted EPS is ________.

A) greater than basic EPS
B) less than basic EPS
C) equal to basic EPS
D) less than or equal to basic EPS

Question 79

When a company has a net loss from continuing operations, it should include ________.

A) all potentially dilutive securities in diluted EPS
B) no potentially dilutive securities in diluted EPS
C) only in the money warrants and options in diluted EPS
D) only convertible issues in diluted EPS

Question 80

The order for antidilutive sequencing is ranking the least dilutive security first, ascending to the most dilutive security last.