Flashcards in FAR 53 - Earnings Per Share Deck (47):
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock. No dividends on common stock were declared during the year. Net income was $2,000,000. What was Jen's basic earnings per share?
$9.00 Earnings per share is: (net income - preferred dividends)/common shares outstanding. Preferred stock dividends are $100 X 10% X 20,000 shares = $200,000. Earnings per share is (2,000,000-200,000)/200,000=$9 per share.
During the current year, Comma Co. had outstanding: 25,000 shares of common stock, 8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are $1,000 par and 9% convertible. The bonds were originally issued at par, and each bond was convertible into 30 shares of common stock. During the year, net income was $200,000, no dividends were declared, and the tax rate was 30%.
What amount was Comma's basic earnings per share for the current year?
One year of preferred stock dividends is subtracted from income in the numerator of EPS because the stock is cumulative. The amount of dividends declared does not affect the calculation. The bonds are not relevant because basic EPS does not assume conversion of the bonds. The calculation is: Basic EPS = [$200,000 - (8,000 x $20 x .10)]/25,000 = ($200,000 - $16,000)/25,000 = $7.36.
Wood Co.'s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?
A. The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should NOT be included in the calculation.
B. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should NOT be included in the calculation.
C. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.
D. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.
C. In general, the dividends subtracted in computing basic EPS are (1) the annual dividend commitment on cumulative preferred whether or not declared or paid, and (2) declared dividends on noncumulative preferred whether paid or not. The firm has negative income. This answer means that the dividends reduce the numerator further - beyond the loss. The final numerator amount is less than (more negative than) the loss. Also, arrear dividends are never included in EPS because they were subtracted in computing EPS in a previous year.
T/F: Preferred stock dividends reduce EPS.
T/F: Convertible preferred stock is ignored for purposes of computing BEPS.
Included in Diluted earnings per share DEPS, not BEPS Basic earnings per share
T/F: At most, one year's cumulative preferred stock dividend requirement is subtracted in the numerator of BEPS.
BEPS Basic earnings per share
T/F: Four amounts must be disclosed on a per share basis on the face of the income statements, assuming dual presentation of EPS (basic and diluted).
T/F: Undeclared noncumulative preferred stock dividends are not subtracted in the numerator of BEPS for any year.
T/F: When dividends are paid to common shareholders, the effect on EPS is that neither basic nor diluted EPS are reduced.
T/F: A complex capital structure implies the presence of securities that can become capital stock in the future.
T/F: For a firm with a simple capital structure, 2 is the fewest number of EPS amounts on the face of the income statement for one single year.
T/F: For the current year, the amount of dividends declared on nonconvertible cumulative preferred stock includes two years of dividends in arrears, as well as one-half of the current year's dividend requirement. 1.0 year of preferred stock dividends should be subtracted in computing EPS for the current year.
On January 31, 2004, Pack, Inc. split its common stock 2 for 1, and Young, Inc. issued a 5% stock dividend. Both companies issued their December 31, 2003, financial statements on March 1, 2004.
Should Pack's 2003 earnings per share (EPS) take into consideration the stock split, and should Young's 2003 EPS take into consideration the stock dividend?
EPS is used primarily as an input to predictions of future earnings. The stock split and dividend cause the number of shares outstanding to increase, and thus affect the future earnings prospects on a per share basis. These events should be included in the computation of EPS even though they did not occur as of the balance sheet date. Financial statement users view the information as if it were current as of the date of publication.
A company had the following outstanding shares as of January 1, year 2:
Preferred stock, $60 par, 4%, cumulative 10,000 shares
Common stock, $3 par 50,000 shares
On April 1, year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, year 2, and no dividends were declared or paid during year 2. Net income for year 2 totaled $236,000. What amount is basic earnings per share for the year ended December 31, year 2?
Basic EPS = Net Income - Preferred Dividends / Weighted shares outstanding. The numerator is $236,000 - preferred dividends [($60 x 10,000) x .04 = 24,000] = $212,000. The denominator is 50,000 (12/12) + 8,000 (9/12) = 56,000 shares. $212,000 / 56,000 = $3.786 or $3.79.
The following information pertains to Jet Corp. outstanding stock for 2004:
Common stock, $5 par value
Shares outstanding, 1/1/04
2-for-1 stock split, 4/1/04
Shares issued, 7/1/04
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 1/1/04
What are the number of shares Jet should use to calculate 2004 earnings per share?
The effect of the stock split is applied retroactively to all changes in the number of shares of common stock outstanding before the split.
The weighted average shares outstanding for this firm for 2004 is: 45,000 = [20,000(2) + 10,000(1/2)]. The split affects only the shares issued before date of the split. The July 1 issuance is weighted only by 1/2 a year because the shares were outstanding only 1/2 a year. EPS is computed only on common stock outstanding. The preferred shares have no effect on the computation.
Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During 2005, 100,000 shares of common stock were outstanding. In 2006, two distributions of additional common shares occurred:
On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued.
Net income was $410,000 in 2006 and $350,000 in 2005.
What amounts should Strauch report as earnings per share in its 2006 and 2005 comparative income statements?
2005 = $1.75
2006 = $1.78
For EPS purposes, stock dividends and splits are retroactively applied to all periods presented, and to all share changes within the year of the split or dividend. This procedure ensures comparability.
The 2-for-1 split in 2006 does not substantively change the value of any shares outstanding. Without retroactive application, EPS would be cut roughly in half in 2006 compared to 2005. Yet there was little substantive change in the performance of the firm. For reporting in 2006:
Weighted average shares, 2005 = 100,000(2) = 200,000.
EPS, 2005 = $350,000/200,000 = $1.75.
Weighted average shares, 2006 = [100,000 + 20,000(9/12)]2 = 230,000
EPS, 2006 = $410,000/230,000 = $1.78.
Had the 2005 shares not been adjusted for the split, 2005 EPS would be $3.50 = $350,000/100,000, or roughly double the EPS of 2006. Without retroactive application, it would appear that the firm had a drastic reduction in EPS in 2006. The retroactive application of the split ensures that the base on which EPS is computed uses the same measuring unit.
T/F: The current year began with 1,000 shares of common stock issued and outstanding. On April 30, the firm purchased 100 shares for the treasury. On October 1, the firm issued a 30% stock dividend. On November 1, the firm issued 300 unissued shares. Weighted average shares for the purpose of computing EPS is 1,263.
1000 - (100*8/12) = 933 + (933*.30) = 1213 + (300*2/12) = 1263
T/F: The denominator of BEPS is typically the ending number of shares of common stock outstanding for the year.
The denominator is typically the weighted avg CS outstanding
T/F: The denominator of BEPS is typically the weighted average number of shares of preferred stock outstanding for the year.
The denominator is typically the weighted avg CS outstanding
T/F: The current year began with 1,000 shares of common stock issued and 200 shares in the treasury. On April 30, the firm reissued 100 of the treasury shares. On October 1, the firm issued 300 previously unissued shares. Weighted average shares for the purpose of computing EPS is 942.
1000 - 200 + (100*8/12) + (300*3/12) = 942
T/F: The number of shares issued as of January 1 was 6,000, which included 1,000 in the treasury. The firm declared and distributed a 40% stock dividend on December 29. The weighted average shares outstanding for the year is 7,000.
(6,000 - 1,000) * 1.40
Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual report to shareholders. Ian has obtained the following information from the controller's office as well as shareholder services:
Net income from January 1 to December 31 $125,000
Number of outstanding shares:
January 1 to March 31 15,000
April 1 to May 31 12,500
June 1 to December 31 17,000
In addition, 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. What amount is Ian's diluted earnings per share for the year ended December 31?
Weighted average shares outstanding for basic EPS = 15,000(3/12) + 12,500(2/12) + 17,000(7/12) = 15,750. Basic EPS = $125,000/15,750 = $7.94. The stock options are antidilutive because the exercise price exceeds the average market price of the stock. Such options would not be assumed exercised. Under the treasury stock method, assuming exercise would result in more shares being purchased for the treasury than issued upon assumed exercised. The result is a decrease in the denominator of diluted EPS causing diluted EPS to exceed basic EPS. Therefore, in this case, diluted and basic EPS are equal.
The treasury stock method of entering stock options into the calculation of diluted EPS:
A. Is used only for dilutive treasury stock.
B. Computes the increase in common shares outstanding from assumed exercise of options to be the number of shares under option.
C. Is called the treasury stock method because the proceeds from assumed exercise are assumed to be used to purchase treasury stock.
D. Assumes the treasury shares are purchased at year-end.
C. Firms may use the proceeds from the exercise of stock options for any purpose. However, to promote uniformity in reporting, and to reduce the dilution from exercise, the assumption is that the proceeds are used to purchase the firm's stock on the market. This reduces the net number of new shares outstanding from assumed exercise.
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Cumulative 8%, $50 par preferred stock.
B. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
C. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
D. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.
C. This security is dilutive. The numerator effect is $49 saving in interest ($1,000 x .07 x (1-.3)), and the denominator effect is 40 more shares outstanding. 49 / 40 = $1.225, which is less than the BEPS of $1.29, so the security is dilutive.
The following information pertains to Ceil Co., a company whose common stock trades in a public market:
Shares outstanding at 1/1 100,000
Stock dividend at 3/31 24,000
Stock issuance at 6/30 5,000
What is the weighted average number of shares Ceil should use to calculate its basic earnings per share for the year ended December 31?
The stock dividend is considered to be outstanding since the beginning of the year. The weighted average is therefore:
100,000+24,000+ (5,000X6/12) = 126,500.
T/F: Diluted extraordinary loss per share may be greater for than for its basic EPS counterpart.
T/F: 4,000 stock options were outstanding all year with an exercise price of $20. The average stock price for the year was $50. The incremental shares for the purpose of computing DEPS is 2,400.
T/F: All year 20,000 stock rights were outstanding. The holder of two rights can purchase one share of stock for $6 a share. The average market price of the stock during the year was $12. If basic EPS = $30,000/10,000 = $3.00, diluted EPS is $2.00.
20,000/10,000 = 2
T/F: If convertible cumulative preferred stock is dilutive, the numerator effect is the annual dividend requirement for the preferred stock.
T/F: DEPS equals BEPS adjusted for the effect of potential common stock.
T/F: A firm has the following potential common stock securities with associated N/D ratios. Each security was outstanding the entire current year.
Potential Common Stock N/D ratio
Basic EPS = $20,000/8,000 = $2.50.
Diluted EPS for this firm is $2.09.
T/F: Only actual conversions or exercises of potential common stock are entered into DEPS.
Securities that may become CS in the future must be included in DEPS to assess the impact of these potential changes on EPS.
T/F: Potential common stock securities (PCS) are included in the computation of diluted EPS because PCS have current contractual claims on the firm.
These are included to assess the impact of the potential changes on EPS.
T/F: The control number for dilution testing is income from continuing operations.
T/F: Net income before extraordinary items is used as the control number for anti-dilution.
Income from continuing operations is the control number used for anti-dilution.
T/F: When more than one potentially dilutive security exists, the numerator effect and denominator effect are computed for each. The N/D ratio, the ratio of numerator effect to denominator effect, is used to determine whether a potentially dilutive security is dilutive regarding the calculation of diluted EPS.
T/F: The main difference between convertible bonds and convertible preferred stock when incorporated into DEPS is that the interest on convertible bonds is an after tax amount, whereas for dividends on preferred stock there is no tax effect.
T/F: If the ratio of numerator effect to denominator effect for a potential common stock is less than BEPS for income from continuing operations, and there is only such security, then DEPS will be less than BEPS.
T/F: On July 1 of the current year, 30,000 stock rights were issued. The issuing firm uses a calendar-fiscal year. The exercise of these rights will result in the issuance of 60,000 shares of common stock. The exercise price is $4 per share. The average market price of the stock during the year was $10. The denominator of the N/D ratio for the rights is 18,000.
T/F: The denominator of DEPS for income from continuing operations is used for all DEPS calculations.
AB Company reported earnings per share of $10.50 on income before extraordinary items and discontinued operations, ($2.00) on income(loss) attributed to discontinued operations, ($1.00) on income(loss) attributed to extraordinary items, and $7.50 on net income. Which EPS figure is more relevant to a potential investor?
Potential investors and current investors are interested in the future earnings potential of the entity. Thus, they are interested in the earnings per share on continuing income, which would be the $10.50 per share. The EPS attributed to discontinued operations and to extraordinary items cannot be used in predicting future earnings, as they are one-time events.
If everything else is held constant, earnings per share is increased by:
A. Purchase of treasury stock.
B. Issuance of new shares of common stock.
C. Payment of a cash dividend to common stockholders.
D. Payment of a cash dividend to both preferred and common stockholders.
A. Earnings per share is calculated by dividing earnings (profit) available to common stockholders by weighted average number of shares of common stock outstanding. If the denominator is decreased by purchasing treasury stock, then the EPS result is increased.
T/F: Under IFRS, EPS must be shown for continuing operations, discontinued operations, extraordinary items, and net income.
T/F: Under IFRS, four is the minimum number of per share disclosures on the face of the income statements assuming two years of presentation of EPS (basic and diluted).
T/F: Both U.S. GAAP and IFRS prohibit reporting basic and diluted EPS on alternative earnings measures.
T/F: Under IFRS, the dilution potential of EPS is determined independently each reporting period