F1 - EPS & Public Company Reporting

Question 1

Form 8K reporting requirements:

Answer 1

Major corporate events, including
Corparate asset acquisitions/disposals,
accountant changes,
management changes,
changes in securities issued (including sales of equity securities).

Question 2

Describe Form 10-K and 10-Q

Answer 2

Form 10-K: Filed annually by US registered companies that annual revenues less than 100 million. Includes a summary of financial data, MD&A, and audited financial statements.
Due date is 75 days.

Form 10-Q: Filed quarterly by large accelerated US registered companies. Includes UNAUDITED financial statements, INTERIM MD&A, and certain disclosures.
Due date is within 40 days of the period end.

Question 3

How do you treat interest expense, discounted amortization and income tax rate when you identify the numerator of dilutive EPS by using the straight line amortization?

Answer 3

When the bonds had been converted: (Interest expense + discounted amortization) - their tax rate = interest expense to add on income.

Interest payment each year
($5,000,000 face x 9% interest) $450,000
Disc. Amortization per year $ 20,000
————-
Total Int. expense reported $470,000
$470,000x(1-25%Tax rate) -$117,500
————–
Interest exp. to add on income $352,500

As a result, interest expense (net of income tax) on convertible debt should be added back to the numerator for diluted EPS and ignored basic EPS, if the effects are dilutive.

Question 4

Basic formula to calculate EPS:

Answer 4

Income available to common stock shareholders / Weighted average number of common shares outstanding

Question 5

List dilutive securities or instruments:

Answer 5

• Stock options and warrants and their equivalents.
• Convertible securities (bonds or preferred stock)
• Contracts settled in stock or cash.
• Contingent issuable shares.

Question 6

Compare BASIC and DILUTIVE EPS:

Answer 6

BASIC EPS: Simple capital structure (only CS outstanding) =
Income available to common stock shareholders / Weighted average number of common shares outstanding

DILUTED EPS: Complex capital structure =
Income available to common stock shareholders (assuming conversion of all dilutive securities) / Weighted average number of common shares outstanding (after conversion of all dilutive securities)

Question 7

Cumulative preferred stock paid or noncumulative preferred stock declared must be…..

Answer 7

subtracted from net income.

Question 8

Stock options are undiluted when….

Answer 8

the exercise price exceeds the market price of the stock.
(e.g. Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share).

So, diluted EPS will be equal to its basic EPS because the stock options out of the money (it makes it antidilutive).

Basic EPS =
Income available to common shareholders / Weighted Avg, number of common shares

Question 9

For the weighted average common shares calculation of EPS preferred stock is:

Answer 9

not considered if it is nonconvertible

Question 10

Give an example of shares the is not considered considered contingent shares to compute EPS.

Answer 10

Shares issuable upon the exercise of a stock option because the option holder is required to pay the strike price to exercise the options.

Question 11

When you calculate the income available for BEPS declared or paid preferred stock dividends ….

Answer 11

are deducted because they are cumulative.

Question 12

The treasury stock method presumes that OPTION sales or proceeds…..

Answer 12

of Shs- ( # of Shs x exercise price) / Avg. Market price = Additional Shs Outstanding

be used to reacquire (repurchase) shares on the open market and that any option requirements will be satisfied by the issuance of new shares to be held in treasury. Treasury shares do not have an impact on the calculation. Computing the dilutive effect of options formula:

of SHS - [# of SHS x Exercise Price) / Avg. Market price] = Additional SHS OS

Question 13

Rule: There is no gain or loss on the purchase and/or sale of treasury stock any “difference” goes to…..

Answer 13

“paid-in capital,” or if there is not enough paid-in capital to absorb a loss, the loss would be debited (subtracted) from “retained earnings.”

Question 14

If the treasury stock’s resale (reacquisition) price exceeds (gain) its bought back (repurchase of the stock) price….

Answer 14

the treasury stock has no affect on retained earnings. It is a gain and recorded as a credit to APIC-TS, not as a credit to retained earnings. Only losses in excess of APIC-TS are booked to retained earnings.

Question 15

Net income or retained earnings will never be increased….

Answer 15

through treasury stock transactions.

Question 16

Gains and losses on treasury stock transactions are never recorded…..

Answer 16

on the income statement.
* Gains are recorded by increasing Additional Paid-in Capital―Treasury Stock.
* Losses are recorded by first eliminating any balance in Additional Paid-in Capital―Treasury Stock and then decreasing retained earnings.

Question 17

What is the rule about appropriating retained earnings?

Answer 17

Rule: There is no requirement to appropriate retained earnings for any purpose. Retained earnings may be set aside for future purposes by classifying a portion as “appropriated.”

Question 18

Rule: A stock dividend (less than 20-25% of the stock outstanding) transfers…..

Answer 18

the FMV of the stock dividend at declaration date from retained earnings to capital stock and paid-in capital. There is NO effect on total stockholders’ equity because all transfers take place within stockholders’ equity.

Question 19

Rule: Cumulative preferred stock dividends are paid….

Answer 19

on PAR value (NOT sales price) and they have a “preference” over common stock dividends until all past preferred stock dividends are paid.

Question 20

Appropriating retained earnings is…..

Answer 20

to disclose to the shareholders that some of the REs are not available to pay the dividends. For example, restricting the earnings for a plant construction. When the construction is completed, it should be restored to unappropriated earnings.

Question 21

If the declared cash dividend $ amount is hire than retained earnings $ amount…

Answer 21

the dividend is a liquidating dividend

Question 22

Book value per common share =

Answer 22

common SH equity / common shares outstanding

Question 23

What do you use to compute diluted EPS?

Answer 23

Rule: All potentially dilutive convertible bonds and preferred stock are used in computing diluted EPS.

Question 24

When computing basic earnings per share, convertible securities are…..

Answer 24

ignored for purposes of computing the weighted average of common shares outstanding.

Question 25

Rule: Stock dividends and stock splits are ….

Answer 25

NOT considered income to the recipient.

Therefore, investors do not record stock dividends at fair market value.

Question 26

What are dilutive securities?

Answer 26

Dilutive securities are financial instruments, such as stock options, stock warrants, convertible preferred shares, and convertible bonds, which could potentially be converted into common stock.

Question 27

When you calculate the weighted average number of shares for stock options and warrants,

Answer 27

use the treasury stock method where you assume the company uses the proceeds from the exercise of options and warrants to buy back common shares at the average MARKET price. The net increase in shares:
The shares issued minus the shares bought back will be added to the weighted average number of shares.
[e.g. 10,000 stock option shares, exercise price $10, the average market price $20.
(10,000x$10)/$20=5,000 shares
Total SHS=10,000+5,000=15,000 stock option shares]

Question 28

List significant dates of cash dividends:

Answer 28

• Date of declaration: Becomes a liability and reduces R/E.
• Date of Record: No JE, memorandum entry only.
• Date of Payment: Actually paid.

Question 29

What are types of dividends:

Answer 29

Cash Liquidating: Return of investment

Property: FMV of assets given up, with gain/loss recognized.

Scrip: Promise to pay a dividend in future

Stock: Results in capitalizing part of R/E, increasing legal capital. Remember, if <20%-25%, record at MV; if >20%-25%, record at par value.

Question 30

What is the effect of Treasury Stock (repurchasing your company’s common stock)?

Answer 30

Since treasury stockholders are not entitled to the rights of ownership provided to common stockholders, reduces total stockholders’ equity and the total capital available to a firm. So, it results in a higher debt-to-total capital ratio as total debt remains unchanged.

Question 31

Rule: Allocate “issue proceeds” of a basket purchase or sale of convertible preferred stock based on relative

Answer 31

fair market values

Question 32

Define treasury stock method

Answer 32

Option proceeds can be used to reacquire shares on the open market and any option requirement will be satisfied by the issuance of new shares to be held in the treasury.

Question 33

When a stock splits (or reverse splits), there is no change to…

Answer 33

Equity. The par value must adjust to proportionally in order to keep total equity constant.

Question 34

DO you take into consideration the stock split and stock dividend when you compute EPS?

Answer 34

Yes. Rule: If stock dividend or a stock split (or reverse split) changes common stock outstanding, the computation of EPS shall give retroactive recognition for all periods presented using the new number of shares.

Question 35

A “retained earnings appropriation” can be used..

Answer 35

to restrict earnings available for dividends.

Rule: A retained earnings appropriation debits (reduces) “unappropriated retained earnings” and sets up (credits) “appropriated retained earnings.” It does not affect the income statement.

Question 36

Dividends are NOT paid on ………….. stock.

Answer 36

treasury stock.

Question 37

Define Regulations SX, S-T, S-B, and S-K:

Answer 37

Regulation S-X sets forth the form and content of and requirements for interim and annual financial statements to be filed with the SEC.

Regulation S-T sets forth rules governing electronic filings.

Regulation S-B sets forth the disclosure requirements for small business issuers.

Regulation S-K sets forth non-financial reporting requirements for various SEC filings used by public companies.