Deck 5: Earnings Per Share

Question 1

Explain why the IASB requires the disclosure of basic and diluted EPS.

Answer 1

The need for basic EPS is simply to increase the understandability and comparability of the earnings number.The need for diluted EPS is to prevent moral hazard,which was discussed in Chapter 1.In the absence of diluted EPS,it would be easier for management to mislead shareholders regarding the profitability of the company by issuing securities such as convertible bonds and stock options that do not entail the issuance of ordinary shares immediately,but which could lead to share issuances in the future.

Question 2

What is the meaning of "net income attributable to ordinary shareholders"?

A) It means net income plus dividends on common and preferred shares.
B) It means net income less dividends on preferred shares.
C) It means net income plus dividends on common shares.
D) It means net income less dividends on common and preferred shares.

Answer 2

B

Question 3

Which of the following is correct about the difference between basic earnings per share (EPS)and diluted earnings per share?

A) Basic EPS uses total common shares outstanding, whereas diluted EPS uses the weighted-average number of common shares.
B) Basic EPS is not a required disclosure, whereas diluted EPS is required disclosure.
C) Basic EPS is not adjusted for the potential dilutive effects of complex financial structures, whereas diluted EPS is adjusted.
D) Basic EPS uses comprehensive income in its calculation, whereas diluted EPS does not.

Answer 3

C

Question 4

Which statement is correct about basic EPS?

A) It is an indicator of profitability that communicates ownership of earnings attributable to a company's dilutive shares.
B) It is an indicator of profitability that communicates ownership of earnings attributable to a company's ordinary shares.
C) It indicates the market price attributable to a company's ordinary shares.
D) It indicates the market price attributable to a company's dilutive shares.

Question 5

What EPS information disclosure is required from private companies that choose to apply international standards?

Question 6

Which statement is correct?

A) Diluted EPS assumes that all dilutive securities are converted.
B) Diluted EPS assumes that all antidilutive and dilutive securities are converted.
C) Diluted EPS assumes that all ordinary securities are converted.
D) Diluted EPS assumes that all ordinary and dilutive securities are converted.

Question 7

Explain why private companies are not required to report EPS under according to ASPE.

Question 8

Which statement is correct?

A) A simple capital structure includes potentially dilutive securities.
B) A simple capital structure excludes potentially dilutive securities.
C) EPS applies only to a company with a simple capital structure.
D) A company with a simple capital structure does not need to calculate EPS.

Question 9

Which statement is correct about basic EPS?

A) It indicates the net income before tax attributable to a company's ordinary shares.
B) It indicates the net income before tax attributable to a company's preferred shares.
C) It indicates the net income attributable to a company's preferred shares.
D) It indicates the net income attributable to a company's ordinary shares.

Question 10

Which statement is correct?

A) Diluted EPS decreases the comparability of financial statements.
B) Diluted EPS decreases the understandability of financial statements.
C) Diluted EPS addresses the moral hazard information asymmetry.
D) Diluted EPS is calculated in the same manner as basic EPS.

Question 11

Explain the difference between basic and diluted EPS.

Question 12

Which statement is correct?

A) A complex capital structure includes potentially dilutive securities.
B) A complex capital structure excludes potentially dilutive securities.
C) EPS applies only to a company with a complex capital structure.
D) A company with a complex capital structure calculates only basic EPS.

Question 13

Briefly explain the main the difference in the requirements of IFRS and ASPE in regards to EPS information.

Question 14

Which statement is correct about basic EPS?

A) It is calculated on the shares outstanding at the beginning of the year.
B) It is calculated on the shares outstanding at the end of the year.
C) It is calculated on the shares issued during the year.
D) It is calculated on the shares outstanding during the year.

Question 15

Which statement is correct about earnings per share (EPS)?

A) EPS does not provide decision-useful information to investors.
B) EPS represents the ordinary share's market value.
C) EPS represents the company's market value.
D) EPS can be used to predict future earnings by analysts.

Question 16

Which statement is correct about earnings per share (EPS)?

A) A company's total earnings is more meaningful than its EPS.
B) EPS represents the total amount of earnings of a company.
C) EPS measures an ordinary share's interest in a company's earnings.
D) The EPS is directly correlated with the company's stock price.

Question 17

Which statement is correct about earnings per share (EPS)?

A) EPS does not need to be disclosed under IFRS.
B) EPS needs to be disclosed under IFRS.
C) EPS is calculated for preferred shares.
D) EPS is a ratio used to assess leverage.

Question 18

Which statement is correct?

A) Basic EPS is based on the dilutive shares outstanding at the end of the year.
B) Basic EPS is based on the dilutive shares outstanding during the year.
C) Basic EPS is based on the ordinary shares outstanding at during the year.
D) Basic EPS is based on the ordinary shares outstanding at the end of the year.

Question 19

Which statement is correct?

A) Basic EPS increases the understandability of financial statements.
B) Basic EPS decreases the understandability of financial statements.
C) Basic EPS addresses the moral hazard information asymmetry.
D) Basic EPS can be calculated in different ways by different companies.

Question 20

Which statement is correct?

A) Companies with a simple capital structure must disclose diluted EPS.
B) Companies with a complex capital structure must disclose diluted EPS.
C) Companies with a simple capital structure do not need to disclose basic EPS.
D) Companies with a complex capital structure do not need to disclose diluted EPS.

Question 21

Explain why other comprehensive income is excluded from the numerator of the EPS calculation.

Question 22

Ned Company reported the following information for its fiscal year: The preferred dividends listed above include the current year and prior accumulated dividends.What is the amount of net income available to common shareholders?

A) $440,000
B) $450,000
C) $470,000
D) $490,000

Question 23

Use the following information to calculate the "net income available to ordinary shareholders":

A) $820,000
B) $860,000
C) $950,000
D) $960,000

Question 24

Use the following information to calculate the "weighted average number of ordinary shares outstanding" (WASO)?

A) 120,000
B) 165,000
C) 185,000
D) 270,000

Question 25

Which statement is correct about the "weighted average number of ordinary shares outstanding" (WASO)?

A) Stock repurchases do not impact the WASO.
B) The actual date of share issuances is ignored in the WASO.
C) The actual date of stock splits is ignored in the WASO.
D) Stock dividends do not impact the WASO.

Question 26

Explain why dividends to preferred shareholders are adjusted in the numerator of the EPS calculation.

Question 27

Use the following information to calculate the "net income available to ordinary shareholders":

A) $3,860,000
B) $3,870,000
C) $3,950,000
D) $3,960,000

Question 28

Explain how the dividends on non-cumulative preferred shares are adjusted in the EPS calculation.What is the underlying logic for this adjustment?

Question 29

Use the following information to calculate the "weighted average number of ordinary shares outstanding" (WASO)?

A) 104,170
B) 159,167
C) 164,830
D) 190,000

Question 30

Which statement is correct about the "weighted average number of ordinary shares outstanding" (WASO)?

A) It is used only in the numerator of the EPS calculation.
B) The weighted average is the number of shares outstanding at the beginning of the year.
C) The weighted average accounts for changes in shares issued or cancelled during the year.
D) It is used only in the denominator of the diluted EPS calculation.

Question 31

Which statement is correct about the "net income attributable to ordinary shareholders"?

A) Other comprehensive income (OCI) is included in this calculation.
B) Other comprehensive income (OCI) is excluded from this calculation.
C) Dividends to preferred shareholders are added to the net income.
D) Dividends to common shareholders are added to the net income

Question 32

What is the meaning of "weighted average number of ordinary shares outstanding"?

A) This is not used in the EPS calculation.
B) This refers to the numerator of the EPS calculation.
C) This refers to the denominator of the basic EPS calculation.
D) This is the not used in the diluted EPS calculation.

Question 33

Use the following information to calculate the "net income available to ordinary shareholders":

A) $1,820,000
B) $1,860,000
C) $1,950,000
D) $1,960,000

Question 34

Use the following information to calculate the "weighted average number of ordinary shares outstanding" (WASO)?

A) 104,170
B) 159,167
C) 164,830
D) 190,000

Question 35

What is the meaning of "net income attributable to ordinary shareholders"?

A) This is not used in the EPS calculation.
B) This refers to the numerator of the EPS calculation.
C) This refers to the denominator of the EPS calculation.
D) This is the not used in the diluted EPS calculation.

Question 36

Use the following information to calculate the "net income available to ordinary shareholders":

A) $860,000
B) $870,000
C) $950,000
D) $960,000

Question 37

Use the following information to calculate the "weighted average number of ordinary shares outstanding" (WASO)?

A) 112,500
B) 152,500
C) 157,500
D) 170,000

Question 38

Which statement is correct about "weighted average number of ordinary shares outstanding"?

A) Treasury shares that are cancelled are adjusted in this calculation.
B) Treasury shares that are not cancelled are adjusted in this calculation.
C) Treasury shares that are repurchased are adjusted in this calculation.
D) Treasury shares are ignored for purposes of this calculation.

Question 39

Which statement is correct?

A) Share issuances increase the EPS denominator.
B) Stock splits have the same effect on EPS as share issuances.
C) Stock dividends have the same effect on EPS as share issuances.
D) Share issuances decrease the EPS denominator.

Question 40

Which statement is correct?

A) Share issuances decrease the EPS numerator.
B) Stock splits have the same effect on EPS as share issuances.
C) Share issuances increase number of shares.
D) Share issuances decrease the EPS denominator.

Question 41

Tropical Island Inc.(TIl)was incorporated on January 1,2018.At that time it issued 300,000 ordinary shares; 10,000,$10,8% preferred shares "A"; and 100,000,$10,9% preferred shares "B." Net income for the year ended December 31,2018 was $1,600,000.TIl declares and pays a total of $68,000 in dividends.Both the preferred shares series A and B are cumulative in nature.Series A must be fully paid their current entitlement as well as any arrears before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 42

Tropical Island Inc.(TIl)was incorporated on January 1,2018.At that time it issued 300,000 ordinary shares; 10,000,$10,8% preferred shares "A"; and 100,000,$10,9% preferred shares "B." Net income for the year ended December 31,2018 was $1,600,000.TIl declares and pays a total of $68,000 in dividends.The series A preferred shares are cumulative and the series B preferred shares are non-cumulative.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 43

For the year ended December 31,2018,Harvest Productions Inc.earned $4,000,000.Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1,2017 and $500,000 in 2% non-cumulative preferred shares issued on January 1,2018.Dividends on the cumulative preferred shares were not declared in 2017.On December 15,2018,Harvest declared $10,000 in dividends on the non-cumulative preferred shares,payable on January 15,2019.Dividends on the cumulative preferred shares are neither declared nor paid.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2018.

Question 44

Accu Tech Renovations Corp.(ATRC)was incorporated on January 1,2018.At that time it issued 100,000 ordinary shares; 80,000,$20,3% preferred shares "A"; and 40,000,$20,6% preferred shares "B." Net income for the year ended December 31,2018 was $1,800,000.ATRC declares and pays total of $238,000 in dividends.Both the preferred shares series A and B are non-cumulative in nature.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 45

Summer Surprise Ltd.(SSL)was incorporated on January 1,2018.At that time,it issued 210,000 ordinary shares; 95,000,$65,2% preferred shares "A"; and 85,000,$65,4% preferred shares "B." Net income for the year ended December 31,2018 was $500,000.SSL neither declares nor pays dividends during the year.Both the preferred shares series A and B are non-cumulative in nature.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 46

Accu Tech Renovations Corp.(ATRC)was incorporated on January 1,2018.At that time it issued 100,000 ordinary shares; 80,000,$20,3% preferred shares "A"; and 40,000,$20,6% preferred shares "B." Net income for the year ended December 31,2018 was $1,800,000.ATRC declares and pays total of $238,000 in dividends.Both the preferred shares series A and B are cumulative in nature.Series A must be fully paid their current entitlement as well as any arrears before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 47

Explain how the dividends on cumulative preferred shares are adjusted in the EPS calculation.What is the underlying logic for this adjustment?

Question 48

For the year ended December 31,2018,Jovial Productions Inc.earned $13,000,000.Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1,2015 and 32,000 $160 non-cumulative preferred shares issued on January 1,2017 that are each entitled to dividends of $7 per annum.Dividends were neither declared nor paid on either class of the preferred shares in 2016 or 2017.On December 15,2018,the company declared and paid the $270,000 dividends in arrears on the 9% cumulative preferred shares.The company also declared and paid $224,000 dividends on the non-cumulative preferred shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2018.

Question 49

Traditional Bathrooms Inc.(TBI)had 80,000 ordinary shares outstanding on January 1,2017.Transactions throughout 2017 affecting its shareholdings follow.
• February 1: TBI issued 200,000,$10,cumulative 10% preferred shares.
• March 1: TBI issued 40,000 ordinary shares.
• April l: TBI declared and issued a 8% stock dividend on the ordinary shares.
• July 1: TBI repurchased and cancelled 30,000 ordinary shares.
• October 1: TBI declared and issued a 3-for-l stock split on the ordinary shares.
• December 31: TBI declared $99,600 in dividends on the ordinary shares.
• Net income for the year ended December 31,2017 was $600,000.Its tax rate was 40%.
Required:
a.What was weighted average number of ordinary shares outstanding in 2017?
b.What was basic EPS in 2017?
c.If the preferred shares issued on February 1,2017 were non-cumulative,what would basic EPS for 2017 have been?

Question 50

For the year ended December 31,2017,Jovial Productions Inc.earned $13,000,000.Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1,2014 and 32,000 $160 non-cumulative preferred shares issued on January 1,2016 that are each entitled to dividends of $7 per annum.Dividends were neither declared nor paid on either class of the preferred shares in 2015 or 2016.On December 15,2017,the company declared and paid $140,000 of the dividends in arrears on the 9% cumulative preferred shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2017.

Question 51

For the year ended December 31,2018,Harvest Productions Inc.earned $4,000,000.Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1,2017 and $500,000 in 2% non-cumulative preferred shares issued on January 1,2018.Dividends on the cumulative preferred shares were not declared in 2017.
Harvest did not declare any dividends during 2018.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2018.

Question 52

Accu Tech Renovations Corp.(ATRC)was incorporated on January 1,2018.At that time it issued 100,000 ordinary shares; 80,000,$20,3% preferred shares "A"; and 40,000,$20,6% preferred shares "B." Net income for the year ended December 31,2018 was $1,800,000.ATRC declares and pays total of $238,000 in dividends.The series A preferred shares arc cumulative and the series B preferred shares are non-cumulative.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic EPS.

Question 53

For the year ended December 31,2017,Jovial Productions Inc.earned $13,000,000.Outstanding preferred shares included $1,500,000 in 9% cumulative preferred shares issued on January 1,2014 and 32,000 $160 non-cumulative preferred shares issued on January 1,2016 that are each entitled to dividends of $7 per annum.Dividends were neither declared nor paid on either class of the preferred shares in 2015 or 2016.On December 15,2017,the company declared $150,000 dividends on the 4% cumulative preferred shares and $150,000 in dividends on the non-cumulative preferred shares,both payable on January 15,2018.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2017.

Question 54

Summer Surprise Ltd.(SSL)was incorporated on January 1,2018.At that time,it issued 210,000 ordinary shares; 95,000,$65,2% preferred shares "A"; and 85,000,$65,4% preferred shares "B." Net income for the year ended December 31,2018 was $500,000.SSL neither declares nor pays dividends during the year.Both the preferred shares series A and B are cumulative in nature.Series A must be fully paid their current entitlement as well as any arrears before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 55

For the year ended December 31,2016,Harvest Productions Inc.earned $4,000,000.Outstanding preferred shares included $400,000 in 3% cumulative preferred shares issued on January 1,2015 and $500,000 in 2% non-cumulative preferred shares issued on January 1,2016.Dividends on the cumulative preferred shares were not declared in 2015.On December 15,2016,Harvest declared and paid $24,000 in dividends on the 3% cumulative shares including the arrears.Harvest also declared and paid the $10,000 dividends on the non-cumulative shares.
Required:
Determine the net income available to ordinary shareholders for the year ended December 31,2016.

Question 56

Hamm Corporation had 200,000 ordinary shares outstanding on January 1,2018.On April 1,2018,Hamm issued an additional 120,000 shares.On July 1,2018,Hamm repurchased 20,000 ordinary shares and cancelled them.On October 1,2018,Hamm issued an additional 50,000 ordinary shares.
Required:
a.What was the weighted average number of ordinary shares outstanding in 2018?
b.Assume that on July 1,2018 Hamm repurchased the shares and held them as treasury shares.Will the weighted average number of ordinary shares outstanding in 2016 change from the amount in part a? Why or why not?

Question 57

Micky and Donald Corp.was founded on January 1,2018.At that time it issued 120,000 ordinary shares and 20,000,$30,cumulative 5% preferred shares.Subsequent transactions affecting its shareholdings follow.
2018
• September 1: Micky issued 300,000,$30,non-cumulative 6% preferred shares.
• December 1: Micky issued 80,000 ordinary shares.
• Dividends were not declared in 2018.
2019
• February 1: Micky issued 30,000 ordinary shares.
• June 1: Micky repurchased 50,000 shares and held them as treasury shares.
• July 1: Micky declared and paid $45,000 in dividends on the cumulative preferred shares, $270,000 on the non-cumulative preferred shares,and $180,000 on the ordinary shares.
• September 1: Micky reissued (sold)the 50,000 shares held in treasury.
• October 1: Micky declared and issued a 3-for-l stock split on the ordinary shares.
• December 1: Micky declared and paid $15,000 in dividends on the cumulative preferred shares,$270,000 on the non-cumulative preferred shares,and $180,000 on the ordinary shares.
• Micky's net income for the year ended December 31,2019 was $2,000,000.Its tax rate was 30%.
Required:
a.What was Micky's weighted average number of ordinary shares outstanding in 2019?
b.What was Micky's basic EPS in 2019?

Question 58

For stock splits and stock dividends,while it is possible to state the number of shares as beginning-of-year equivalents,it makes more sense to use end-of-year equivalents because financial statement readers are evaluating EPS after the end of the year.Explain why the adjustment for stock splits and stock dividends is standardized.

Question 59

Summer Surprise Ltd.(SSL)was incorporated on January 1,2018.At that time,it issued 210,000 ordinary shares; 95,000,$65,2% preferred shares "A"; and 85,000,$65,4% preferred shares "B." Net income for the year ended December 31,2018 was $500,000.SSL neither declares nor pays dividends during the year.The series A preferred shares are cumulative and the series B preferred shares are non-cumulative.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 60

Tropical Island Inc.(TIl)was incorporated on January 1,2018.At that time it issued 300,000 ordinary shares; 10,000,$10,8% preferred shares "A"; and 100,000,$10,9% preferred shares "B." Net income for the year ended December 31,2018 was $1,600,000.TIl declares and pays a total of $68,000 in dividends.Both the preferred shares series A and B are non-cumulative in nature.Series A must be fully paid their current entitlement before any monies are paid to the Series B shareholders.
Required:
Compute basic BPS.

Question 61

Which statement is correct about the "if-converted" method for EPS?

A) This method assumes the interest is paid on the convertible security until it was converted into ordinary shares.
B) This method assumes the interest is paid on the convertible security for one-half of the year.
C) This method assumes the interest is paid on the convertible security for the period after its issue date.
D) This method assumes the no interest is paid on the convertible security for the entire year.

Question 62

Calculate the income effect on the incremental EPS for the following instrument:

A) 0.75
B) 2.25
C) 40,000
D) 90,000

Question 63

Which statement is correct about the "income effect" on EPS?

A) This is the incremental before-tax income available to ordinary shareholders.
B) This is the incremental after-tax income available to ordinary shareholders.
C) This is the incremental number of ordinary shares outstanding before conversion.
D) This is the incremental number of ordinary shares outstanding after conversion.

Question 64

Calculate the share effect on the incremental EPS for the following instrument:

A) 0.63
B) 0.94
C) 75,000
D) 80,000

Question 65

Calculate the share effect on the incremental EPS for the following instrument:

A) 5
B) 25,000
C) 50,000
D) 250,000

Question 66

Calculate the incremental EPS for the following instrument:

A) 1.05
B) 1.88
C) 40,000
D) 3.15

Question 67

Calculate the incremental EPS for the following instrument:

A) $0.36
B) $0.84
C) $40.00
D) $105,000

Question 68

Which statement is correct?

A) Diluted EPS will always be less than basic EPS.
B) Diluted EPS will always be greater than basic EPS.
C) Diluted EPS will always be equal to EPS.
D) Diluted EPS will be less than or equal to basic EPS.

Question 69

What is the meaning of an "in the money call option"?

A) A call option is in-the-money when the market price means that it will expire un-exercised.
B) A call option is in-the-money if the market price of the share equals the exercise price.
C) A call option is in-the-money if the market price of the share is less than the exercise price.
D) A call option is in-the-money if the market price of the share exceeds the exercise price.

Question 70

Calculate the incremental EPS for the following instrument:

A) $0.14
B) $0.20
C) $1.40
D) $2.00

Question 71

Which statement is correct about the "share effect" on EPS?

A) This is the incremental before-tax income available to ordinary shareholders.
B) This is the incremental after-tax income available to ordinary shareholders.
C) This is the incremental number of ordinary shares outstanding before conversion.
D) This is the incremental number of ordinary shares outstanding after conversion.

Question 72

Which statement is correct about the "if-converted" method for EPS?

A) This method assumes the convertible security is converted into ordinary shares at the end of the fiscal period.
B) This method assumes the convertible security is converted into ordinary shares at the beginning of the fiscal period.
C) This method assumes the convertible security is converted into ordinary shares evenly over the fiscal period.
D) This method assumes the convertible security is converted into ordinary shares at the mid-point of the fiscal period.

Question 73

Which statement is correct about potential ordinary shares (POS)?

A) Dilutive POS decrease EPS.
B) Dilutive POS increase EPS.
C) Anti-dilutive POS decrease EPS
D) Anti-dilutive POS are included in EPS.

Question 74

Which of the following are financial instruments that give rise to POS?

A) Convertible bonds that can be exchanged for cumulative preferred shares.
B) Convertible preferred shares that can be exchanged for ordinary shares.
C) Land that can be exchanged for preferred shares.
D) Stock options and warrants that permit the holder to buy preferred shares from the company at a predetermined price.

Question 75

Calculate the income effect on the incremental EPS for the following instrument:

A) $1.00
B) $75,000
C) $175,000
D) $250,000

Question 76

Calculate the incremental EPS for the following instrument:

A) 0.63
B) 1.88
C) 40,000
D) 2.10

Question 77

Which statement is correct?

A) The numerator for diluted EPS is the same as the numerator for basic EPS.
B) Potential ordinary shares are derivative instruments that entitle the holder to commodities.
C) Potential ordinary shares are financial instruments that entitle the holder to ordinary shares.
D) The numerator for diluted EPS is always greater than the numerator for basic EPS.

Question 78

Calculate the incremental EPS for the following instrument:

A) 0.63
B) 1.88
C) 40,000
D) 75,000

Question 79

Calculate the income effect on the incremental EPS for the following instrument:

A) $0.96
B) $2.24
C) $120,000
D) $280,000

Question 80

Calculate the incremental EPS for the following instrument:

A) $0.30
B) $0.70
C) $1.00
D) $2.00