Deck 21: Earnings Per Share

Question 1

Basic EPS measures the earnings available to common shareholders based on existing outstanding shares during the period.

Answer 1

True

Question 2

Retroactive application of stock splits and stock dividends makes EPS comparable for prior and current periods of one entity.

Answer 2

True

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

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

Question 5

George Manufacturing had net income of $200,000 and declared preferred dividends of $25,000 during the current year.George began the year with 20,000 common shares outstanding.It issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1.Compute George's basic EPS for the year.

A)$3.50
B)$3.98
C)$5.15
D)$7.95

Question 6

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 7

The EPS denominator for basic earnings per share includes all outstanding common shares at the end of the year.

Question 8

Charlotte Engineering experienced net income of $450,000 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 10% common stock dividend.Compute the weighted-average common shares outstanding for the year.

A)100,000
B)105,000
C)110,000
D)120,000

Question 9

Charlotte Engineering experienced net income of $450,000 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 10% common stock dividend.Compute the basic EPS for the year.

A)$3.82
B)$4.00
C)$4.20
D)$4.29

Question 10

George Manufacturing had net income of $200,000 and declared preferred dividends of $25,000 during the current year.George began the year with 20,000 common shares outstanding.It issued 30,000 shares on June 30 and repurchased 6,000 of the newly issued shares on November 1.Compute George's weighted-average common shares outstanding for the year.

A)22,000
B)34,000
C)44,000
D)50,000

Question 11

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

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

Question 12

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

Question 13

Managers can be motivated to manage EPS when ________.

A)the national economy is in a downturn
B)the country is in armed combat
C)the company is newly formed
D)their compensation is based on net income or stock price

Question 14

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

A)the prior year
B)all prior years
C)all years reported in the current annual report
D)the past five years reported in the current annual report

Question 15

When a stock split or stock dividend occurs during the year,it is retroactive to the beginning of the year.

Question 16

The denominator of the basic EPS equation contains the ________.

A)weighted-average shares of common stock outstanding for the year
B)number of shares of common shares outstanding stock 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 17

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

Question 18

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)market valuation of trading securities
D)choice of inventory cost flow assumptions

Question 19

Income available to common shareholders is net income minus dividends paid during the year to preferred shareholders.

Question 20

Edmond Biometrics experienced net income of $500,000 for both last year and the current year.The shares outstanding for the prior year was 100,000 shares for the whole year.On December 1 of the current year,Edmond declared a two for one stocksplit.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.

A)Year 1 $5.00; Year 2 $2.50
B)Year 1 $2.50; Year 2 $2.50
C)Year 1 $5.00; Year 2 $10.00
D)Year 1 $5.00; Year 2 $4.62

Question 21

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

Question 22

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

Question 23

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 24

A simple capital structure contains no potentially dilutive securities.

Question 25

Hudson Motors reported $535,000 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.

A)$4.46
B)$4.11
C)$3.96
D)$3.65

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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 33

Hornet Motors reported $535,000 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 but Hornet did declare and distribute a 10% stock dividend on common shares on July 1.Compute basic earnings per share.

A)$4.46
B)$4.05
C)$3.96
D)$3.59

Question 34

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 35

Robertson Corporation reported net income for Year 1 of $250,000 and Year 2 of $300,000.The weighted-average common shares outstanding 100,000 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.

A)Year 1,$2.00; Year 2,$2.00
B)Year 1,$2.00; Year 2,$2.08
C)Year 1,$2.00; Year 2,$2.50
D)Year 1,$2.50; Year 2,$2.08

Question 36

Interurban Company began operations on the first day of the year.On that day they issued 10,000 shares.On March 1 they issued 20,000 shares and on July 1,another 30,000 shares.On December 1,Interurban repurchased 5,000 shares of outstanding shares.Compute basic EPS for the first year of operation if net income was $60,000.

A)$1.64
B)$1.45
C)$1.20
D)$1.00

Question 37

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

Question 38

When computing EPS,it does not matter if convertible issues occur before the beginning or during the current fiscal year.

Question 39

Greenwell Coffee Company began operations on the first day of the year.On that day they issued 10,000 shares.On March 1 they issued 20,000 shares and on July 1,another 30,000 shares.On December 1,Greenwell repurchased 5,000 shares of outstanding shares.Compute the weighted-average shares of stock for the first year of operation.

A)60,000
B)55,000
C)41,250
D)36,667

Question 40

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

Question 41

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 42

McManus Inc.reported net earnings of $400,000 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 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 $2.00; diluted EPS $1.67
B)basic EPS $2.00; diluted EPS $1.91
C)basic EPS $2.00; diluted EPS $1.93
D)basic EPS $1.93; diluted EPS $1.93

Question 43

Gray Corporation reported $200,000 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)$80,000
C)$120,000
D)$200,000

Question 44

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 $2,000,000 of 8% long-term bonds at par which are still outstanding.The bonds are convertible into 50,000 shares of common stock.The tax rate for all years is 40%.If Terrell has no other potentially dilutive securities and no preferred stock,what are basic and diluted EPS?

A)basic EPS $4.75; diluted EPS $4.18
B)basic EPS $5.34; diluted EPS $4.18
C)basic EPS $4.75; diluted EPS $3.80
D)basic EPS $5.34; diluted EPS $3.80

Question 45

A company with convertible bonds outstanding will need to adjust the denominator of the EPS equation.The adjustment will consist of the ________.

A)number of bonds in the 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 46

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 4 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.
Instructions: Write the EPS formula.Show all computations used in your solution.

Question 47

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 issued on June 1.Each $1,000 bond is convertible into 40 shares of common stock.200,000 common shares were outstanding all year.Determine the denominator for both basic and diluted EPS when the tax rate is 40%.

A)basic EPS 200,000; diluted EPS 200,000 + (5,000 × 40)(5/12)
B)basic EPS 200,000 (7/12); diluted EPS 200,000 + (5,000 × 40)(7/12)
C)basic EPS 200,000; diluted EPS 200,000 + (5,000 × 40)(7/12)
D)basic EPS 200,000 (5/12); diluted EPS [200,000 + (5,000 × 40)] (5/12)

Question 48

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

Question 49

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 issued on May 1.Each 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%.
Instructions: Write the EPS formula.Show all computations used in your solution.

Question 50

Harvey Inc.reported net earnings of $500,000 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 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 $2.50; diluted EPS $2.44
B)basic EPS $2.50; diluted EPS $2.50
C)basic EPS $2.44; diluted EPS $2.44
D)basic EPS $2.50; diluted EPS $2.27

Question 51

Austin Products reported $350,000 net income for the year with 100,000 common shares outstanding all year.Austin also had 50,000 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 $350,000 - (50,000 × $100 × 8%); diluted EPS $350,000 - (50,000 × $100 × 8%)
B)basic EPS $350,000 - (50,000 × $100 × 8%); diluted EPS $350,000
C)basic EPS $350,000 - (50,000 × $100 × 8%); diluted EPS $350,000 + (50,000 × $100 × 8%)
D)basic EPS $350,000; diluted EPS $350,000

Question 52

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 53

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

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

Question 54

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

Question 55

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

Question 56

Baker 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 issued on June 1.Determine the numerator for both basic and diluted EPS when the tax rate is 40%.

A)basic EPS $6,000,000 - $50,000; diluted EPS $6,000,000 - $50,000 + ($300,000 × 5/12)(1 - .40)
B)basic EPS $6,000,000 - $50,000; diluted EPS $6,000,000 - $50,000 + ($300,000 × 7/12)(1 - .40)
C)basic EPS $6,000,000 - $50,000 (7/12); diluted EPS $6,000,000 - $50,000 (7/12)+ ($300,000 × 7/12)(1 - .40)
D)basic EPS $6,000,000 - $50,000 (5/12); diluted EPS $6,000,000 - $50,000 (5/12)+ ($300,000 × 5/12)(1 - .40)

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

When applying the if-converted assumption for potentially diluted 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)at the beginning of the current year or on the issue date of the dilutive security if issued during the year

Question 59

Austin Products reported $350,000 net income for the year with 100,000 outstanding common shares all year.Austin issued 50,000 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 $350,000 - [(50,000 × $100 × 8%)(2/12)]; diluted EPS $350,000
B)basic EPS $350,000 - [(50,000 × $100 × 8%)(2/12)]; diluted EPS $350,000 - (50,000 × $100 × 8%)
C)basic EPS $350,000; diluted EPS $350,000
D)basic EPS $350,000 - [(50,000 × $100 × 8%)(10/12)]; diluted EPS $350,000

Question 60

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 61

Smythe,Inc.has four potentially dilutive securities.Computation of the antidilution sequencing recorded the following: What is the correct order of entry into the EPS computation?

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

Question 62

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

Question 63

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 64

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 issued on July 1.Each 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%.
Instructions: Write the EPS formula.Show all computations used in your solution.

Question 65

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 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 a 10% stock dividend.Compute both basic and diluted EPS when the tax rate is 40%.
Instructions: Write the EPS formula.Show all computations used in your solution.

Question 66

Realty1 has 40,000 outstanding stock options.Its net income for the year is $250,000.Each option allows the holder to purchase a share of stock for $14.The average market value of the shares for the year was $17.What is the incremental income per common share?

A)$0.00
B)$1.00
C)$1.50
D)$2.00

Question 67

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

Question 68

Edwards Corporation has three potentially dilutive securities.Computation of the antidilution sequencing recorded the following: What is the correct order of entry into the EPS computation?

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

Question 69

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 70

Colselo has 200,000 common share outstanding for the year and net income of $400,000.It has 20,000 stock options and 20,000 shares of $100,6% cumulative preferred stock,both of which were outstanding for the entire year.Compute basic and diluted EPS.

A)basic EPS $2.00; diluted EPS $1.67
B)basic EPS $2.00; diluted EPS $1.27
C)basic EPS $1.40; diluted EPS $1.27
D)basic EPS $1.40; diluted EPS $1.67

Question 71

Antidilutive securities are excluded from the diluted EPS equation.

Question 72

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

Question 73

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 the diluted EPS is ________.

A)greater than the basic EPS
B)less than the basic EPS
C)the same as basic EPS
D)either the same or less than basic EPS

Question 74

Carrolton,Inc.has four potentially dilutive securities.Computation of the antidilution sequencing recorded the following: What is the correct order of entry into the EPS computation?

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

Question 75

When there are multiple dilutive securities in a firm,the 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 76

Executrain has 50,000,7%,bonds outstanding for the second half of the year.Each $1,000 bond,sold July 1 at par,is convertible into 20 shares of common stock.The corporate tax rate is 40%.What is the incremental income per common share?

A)$0.70
B)$1.05
C)$1.50
D)$2.10

Question 77

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 78

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

Question 79

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

Question 80

Ace Corporation has 10,000 shares of $100,6%,convertible preferred shares outstanding for the whole year.Each preferred share is convertible into 4 shares of common stock.What is the incremental income per common share?

A)$0.67
B)$1.00
C)$1.50
D)$2.00