F1 M2 EPS and Public Company Reporting Topics Flashcards
If a company issues a stock dividend or performs a stock split on Jul. 1, what weight should the company give the newly issued shares in calculating EPS for the year ended Dec. 31?
The company should include the newly issued shares in EPS for the entire year regardless of the date of the stock dividend or stock split.
How is a cumulative preferred stock dividend calculated?
par × number of preferred shares outstanding × percentage cumulative
Example:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding
$10 par × 25,000 shares × 4% = $10,000
How do preferred stock dividends affect the calculation of basic EPS?
Preferred dividends accumulated during the period on cumulative preferred stock–or preferred dividends declared during the period on noncumulative preferred stock–must be subtracted from net income to arrive at income available to common shareholders, which is then divided by the average common shares outstanding.
Payment of preferred dividends has no effect on basic EPS.
Example:
Net income: $500,000
Less cumulative preferred dividend for the year: ($10,000)
Payment of cumulative preferred dividend during the year: $16,000 (irrelevant)
Income available to common shares: $490,000
Divide by average common shares O/S: 200,000
Basic earnings per common share: $2.45
How are basic earnings per common share calculated?
(Net income - preferred dividends)* ÷ weighted average common shares O/S
* aka income available to common shareholders
When considering several potentially dilutive securities, which should be excluded from calculating diluted EPS?
Any antidilutive securities should be excluded.
Antidilutive securities increase diluted EPS.
Example:
- Conversion of convertible bonds would have reduced earnings per share by $0.75.
- Exercise of common stock options would have increased earnings per share by $0.10.
The convertible bonds should be included in diluted EPS, but the common stock options should be excluded.
The exercise price of Acme’s employee stock options is higher than the market price of Acme’s common stock on Dec. 31. Should Acme include employee stock options in its calculation of diluted EPS as of Dec. 31?
No, because the employee stock options are antidilutive.
Exercising the stock options would increase diluted EPS.
Example: Acme’s employees exercise 100,000 stock options at $32/share when the stock’s market price is $30/share. Acme issues 100,000 new shares and receives 100,000 × $32 = $3,200,000 in cash proceeds.
Use the treasury stock method to determine dilution:
Hypothetically, if the company used the $3,200,000 to buy back shares at the market price ($30), it could repurchase 106,667 shares, which is more than the 100,000 new shares it issued. Therefore, total shares outstanding would decrease, and EPS would increase, which would be anti-dilutive.
Within how many days after fiscal year-end must an accelerated filer file its 10-K?
75 days.
A company is in an industry that is not subject to seasonality. For what dates must it present balance sheets on its 10-Q?
The most recent quarter-end and the preceding fiscal year-end.
Within how many days after fiscal year-end must a large accelerated filer file its 10-K?
60 days.
Within how many days after a quarter-end must a large accelerated filer file its 10-Q?
40 days.
Within how many days after fiscal year-end must a non-accelerated filer file its 10-K?
90 days.
What qualifies an issuer as an accelerated filer?
- public float >= $75 million and <= $700 million
- subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months
- previously filed at least one report
- not eligible to file quarterly and annual reports on Forms 10-QSB and 10-KSB
What qualifies an issuer as a large accelerated filer?
- public float > $700 million
What qualifies an issuer as a non-accelerated filer?
- public float < $75 million and/or
- annual revenues of less than $100 million
Within how many days after a quarter-end must a non-accelerated filer file its 10-Q?
45 days.
Within how many days after a quarter-end must an accelerated filer file its 10-Q?
40 days.
Must a company report earnings per share for discontinued operations?
Yes, a company must report basic and diluted (if applicable) EPS for discontinued operations on the income statement or in the notes to the financial statements.
Should non-convertible preferred stock be included in earnings per share?
No, only common stock should be included in basic EPS. The potentially dilutive effects of convertible preferred stock should be considered for possible inclusion only in diluted EPS.
What effect does a company’s purchase of treasury stock have on its EPS?
A purchase of treasury stock would reduce shares outstanding and therefore increase EPS.
How does a company determine whether a convertible security is dilutive for purposes of calculating EPS?
The company must determine whether the savings per newly issued share from converting the security is less than basic EPS.
Example: Acme has basic EPS of $1.29 and a tax rate of 30%. It has issued 7% convertible bonds at $1,000 par value, and each bond is convertible into 40 shares of common stock. If the bonds were converted, the firm would save $49 of after-tax interest expense on each bond annually:
$1,000 x .07 x (1 - .30) = $49
The $49 would be distributed across 40 newly issued shares:
$49 ÷ 40 = $1.225
Because $1.225 < $1.29, the convertible bonds are dilutive. The savings in the numerator would not be enough to offset the increased number of shares in the denominator.
Which SEC regulation contains requirements for the form and content of interim and annual financial statements filed with the SEC?
Regulation S-X
In the two-statement approach for displaying comprehensive income, which components of net income are shown on the statement of comprehensive income?
Only net income is shown, followed by the components of other comprehensive income, net of tax.
How are diluted earnings per share calculated?
(Income available to common stockholders + Interest on dilutive securities*) / Weighted average number of common shares, including all dilutive securities converted to common stock
*Adding back after-tax interest on dilutive securities increases income available to common stockholders
Example: Acme has 500,000 common shares outstanding and 10,000 5% convertible bonds, each valued at $100 par and convertible into one common share. The bonds pay interest annually on Dec. 31. Acme’s tax rate is 30%.
As of Dec. 31, 2024, Acme’s basic EPS is $7.00 per share. Therefore, income available to common shareholders is $7.00 x 500,000 = $3,500,000.
Converting the bonds would add $35,000 of savings on after-tax interest to earnings (5% x $100,000 x 70% = $35,000) but would add 10,000 shares to total shares outstanding. The effect on EPS would be ($3,500,000 + $35,000) / (500,000 + 10,000) = $6.93 diluted earnings per share.
Under Regulation S-X, what periods must be presented in the statement of cash flows in interim financial statements filed with the SEC?
- Fiscal year-to-date as of the most recent fiscal quarter
- The corresponding period for the preceding fiscal year
