Question 1

A simple capital structure refers to a shareholders' equity section which only has common shares and no potentially dilutive securities that, upon their conversion or exercise in the aggregate, would dilute earnings per share.

Accepted Answer

The answer of A simple capital structure refers to a...

Question 2

When computing the weighted average number of shares outstanding, an actual conversion of convertible preferred shares is assumed to have occurred on the first day of the year, regardless of when it was converted.

Accepted Answer

The assumption of conversion on the first day of the year applies to the calculation of diluted earnings per share, not the weighted average number of shares outstanding.

Question 3

An anti-dilutive effect means that EPS is decreased as a result.

Accepted Answer

An anti-dilutive effect occurs when the addition of securities, like convertible bonds or stock options, increases the earnings per share (EPS), rather than decreasing it.

Question 4

If the corporation purchases common treasury stock, those shares would be included in the EPS computation only for the fraction of the year that they were outstanding.

Accepted Answer

When a corporation purchases its own common treasury stock, those shares are considered to be not outstanding and are not included in the earnings per share (EPS) computation for any part of the year.

Question 5

The diluted EPS should be disclosed in the financial statements only if it is materially different from basic EPS.

Accepted Answer

Diluted EPS must be disclosed in the financial statements regardless of whether it is materially different from basic EPS, as it provides information on the potential dilution of shares and its impact on earnings per share.

Question 6

Nonconvertible, cumulative preferred shares affect the computation of EPS (for simple capital structure), basic EPS and diluted EPS.

Accepted Answer

Nonconvertible, cumulative preferred shares affect the computation of basic EPS by requiring that dividends on these shares be subtracted from net income to calculate earnings available to common shareholders. However, they do not affect diluted EPS since they are not convertible into common shares.

Question 7

When a midyear stock dividend increases the number of common shares outstanding for the period, the average number of common shares outstanding is computed as if the stock dividend was distributed at the beginning of the year.

Accepted Answer

When computing the average number of common shares outstanding during the year, a midyear stock dividend is treated as if it had been issued at the beginning of the period in which the dividend is declared. This means the additional shares are weighted for the portion of the year after the dividend is declared, not the entire year.

Question 8

When different classes of common shares exist, a separate calculation of EPS is required for each class of common shares when dividend privileges differ by share class.

Accepted Answer

The answer of When different classes of common shares exist,...

Question 9

Company A has an EPS of $6 and Company B has an EPS of $23.Based on this information, Company B is the better investment.

Accepted Answer

EPS (Earnings Per Share) alone does not determine whether a company is a better investment, as it doesn't account for factors like market price, company growth potential, industry conditions, or dividend payments.

Question 10

When a midyear stock dividend increases the number of common shares outstanding for the period, the new shares resulting from the dividend are weighted by one-half a year for purposes of computing EPS.

Accepted Answer

The new shares resulting from a midyear stock dividend are weighted for the portion of the year they are outstanding, not automatically by one-half a year. The weighting depends on when during the year the stock dividend occurs.

Question 11

When there has been a retrospective change in Accounting policy or a restatement, EPS figures must be recalculated accordingly.

Accepted Answer

The answer of When there has been a retrospective change...

Question 12

At December 31, 2014, the shareholders' equity of ABC Inc.reported as outstanding: 100 common shares and 30 nonconvertible preferred shares.On July 1, 2015, ABC Inc.issued a 10 percent stock dividend on its common shares and paid a cash dividend of
$2.00 per share on its preferred (the full year's requirement).Income for the year ended December 31, 2015 was $1,170.The 2015 EPS, rounded to the nearest cent, for ABC Inc.should be $8.58.

Accepted Answer

The calculation of EPS (Earnings Per Share) does not directly involve preferred dividends or stock dividends in the way described. EPS is calculated by taking the net income (earnings) available to common shareholders and dividing it by the weighted average number of common shares outstanding during the period. The issuance of a stock dividend increases the number of shares outstanding, which would typically decrease the EPS if the net income remains constant. However, without knowing the original number of shares outstanding before the stock dividend and the exact earnings attributable to common shareholders (after subtracting preferred dividends), the exact EPS cannot be determined from the information provided.

Question 13

EPS figures must be disclosed on the face of the financial statements for discontinued operations.

Accepted Answer

The answer of EPS figures must be disclosed on the...

Question 14

Option adjustments are based on the treasury stock method.

Accepted Answer

Option adjustments are typically based on the Black-Scholes model or binomial models for pricing, not the treasury stock method, which is used for calculating diluted earnings per share.

Question 15

ABC Inc.has 20,000 common shares outstanding throughout the year.It also had 20,000, 6 percent preferred shares, par $20, (cumulative and nonconvertible)outstanding throughout the year.Net income was $300,000.The earnings per share amount would be
$13.80

Accepted Answer

The earnings per share (EPS) calculation for common shares does not directly include preferred dividends. First, you calculate the preferred dividends: 20,000 shares * $20 * 6% = $24,000. Then, subtract this from the net income: $300,000 - $24,000 = $276,000. Finally, divide by the number of common shares: $276,000 / 20,000 = $13.80. However, the statement is misleading as it implies the $13.80 is directly calculated without considering the preferred dividends, which are indeed factored into the EPS calculation for common shares. The correct EPS calculation acknowledges the preferred dividends.

Question 16

For purposes of computing the average number of common shares outstanding, stock dividends are treated in the same manner as stock splits.

Accepted Answer

The answer of For purposes of computing the average number...

Question 17

A reverse split may be used to increase the value per share of a company.

Accepted Answer

The answer of A reverse split may be used to...

Question 18

Basic EPS & Fully diluted EPS are both historical amounts.

Accepted Answer

The answer of Basic EPS & Fully diluted EPS are...

Question 19

For purposes of computing the weighted average number of shares outstanding during the year, a midyear event that must be treated as occurring at the beginning of the year is the purchase of treasury stock.

Accepted Answer

The purchase of treasury stock is treated as occurring at the exact date it happens during the year, not at the beginning of the year, for the purpose of computing the weighted average number of shares outstanding.

Question 20

Bonds and preferred share adjustments are based on the if-converted method.

Accepted Answer

The if-converted method is used for calculating diluted earnings per share, not for adjusting bonds and preferred shares.

Quiz 20: Earnings Per Share