Question 1

Which of the following statistics is generally computed for both common and preferred stock?

Accepted Answer

Annual dividend per share is a statistic that can be computed for both common and preferred stock, as both types of stock can pay dividends to shareholders.

Question 2

The numerator in calculating earnings per share is reduced for:

Accepted Answer

The numerator in calculating earnings per share is the net income available to common shareholders. Therefore, preferred dividends, which are paid to preferred shareholders and not common shareholders, are subtracted from the numerator.

Question 3

An example of an extraordinary gain or loss is:

Accepted Answer

The answer of An example of an extraordinary gain or...

Question 4

The price-earnings ratio is the:

Accepted Answer

The price-earnings ratio is calculated by dividing the market price of a share of common stock by its earnings per share (EPS). It is used as a valuation tool to determine how much investors are willing to pay for each dollar of earnings generated by the company.

Question 5

The purpose of developing the subtotals "Income before Extraordinary Items" and "Income from Continuing Operations" in an income statement is to:

Accepted Answer

The answer of The purpose of developing the subtotals "Income...

Question 6

Doogle Corporation sold a segment of its operations in 2009 and suffered an extraordinary loss in 2010. Which of the following would be the most useful in attempting to predict Doogle's performance for 2011?

Accepted Answer

Doogle's income from continuing operations in 2009 and 2010 would be the most useful in attempting to predict Doogle's performance for 2011 as it would reflect the company's ongoing operations and would not be impacted by the sale of the segment or the extraordinary loss. Net income would not be as useful as it includes one-time events such as the sale and extraordinary loss. Total assets and retained earnings would not necessarily reflect the company's ongoing operations or predict future performance.

Question 7

Execucomp Corporation's financial statements in the current year show a loss from discontinued operations, a prior period adjustment, and an extraordinary gain. If Execucomp's income statement is prepared according to generally accepted accounting principles (as illustrated in your text), which of the following four items would appear second in sequence in the income statement?

Accepted Answer

The answer of Execucomp Corporation's financial statements in the current...

Question 8

The amount of earnings per share is usually computed:

Accepted Answer

Earnings per share for common stock is computed by deducting the dividends on preferred stock from net income and then dividing the remaining amount by the weighted average number of common shares outstanding. This is because preferred stock dividends are paid out before calculating earnings available to common stockholders.

Question 9

Earnings per share figures are shown in the income statement:

Accepted Answer

Earnings per share figures are shown in the income statement for income before extraordinary items and for income from continuing operations, as well as for net income. This is because it helps investors and analysts to evaluate the profitability of the company on a per-share basis, which is a common way to compare different companies. Option B is not correct because earnings per share figures are only calculated for common stock, not for preferred stock. Option C is not correct because the disclosure of earnings per share figures is only necessary for publicly owned corporations. Option D is also not correct as earnings per share figures are required to be disclosed by all publicly owned corporations, and cannot be omitted or disclosed only in a footnote.

Question 10

The common stock of Securetech Corporation consistently sells at a market price of 20 times earnings . What would be the most likely effect of a 10 cent increase in Securetech's basic EPS?

Accepted Answer

Since the market price is consistently 20 times earnings, a 10 cent increase in EPS would result in a $2 increase in market price ($0.10 x 20). This is assuming that the P/E ratio remains constant.

Question 11

A prior period adjustment is a correction made to:

Accepted Answer

A prior period adjustment is a correction made to the beginning balance of retained earnings for an accounting period. It is used to correct errors made in previous financial statements that were not discovered until the current period. The adjustment is not made to net income of the current year, and it is not limited to last year's financial statements.

Question 12

Large stock dividends tend to:

Accepted Answer

Large stock dividends typically keep stock prices down because they represent a distribution of earnings to shareholders, reducing the overall value of the company.

Question 13

Which of the following would have no effect on Retained Earnings?

Accepted Answer

Declaration of a stock split does not affect retained earnings because it simply increases the number of shares outstanding while proportionally adjusting the share price, without altering the company's equity or the individual's proportionate share of that equity.

Question 14

Which of the following has no effect on the computation of earnings per share for the current period?

Accepted Answer

The answer of Which of the following has no effect...

Question 15

All things being equal, if investors expect earnings to increase substantially from current levels, the price/earnings ratio will:

Accepted Answer

If investors expect earnings to increase substantially, they will be willing to pay a higher price for the stock, thus increasing the price/earnings ratio.

Question 16

Which of the following would be classified as an extraordinary item?

Accepted Answer

The answer of Which of the following would be classified...

Question 17

Of the items listed, which would appear closest to the bottom of the income statement?

Accepted Answer

The answer of Of the items listed, which would appear...

Question 18

On January 31, 2009, Village Bank had 500,000 shares of $2 par value common stock outstanding. On that date, the company declared a 14% stock dividend when the market price of the stock was $37 per share. The immediate effect of this dividend upon Village Bank was:

Accepted Answer

A stock dividend does not result in a reduction of cash, so option A is incorrect. A stock dividend transfers a portion of retained earnings into additional shares of stock. Thus, option C is incorrect as it underestimates the reduction in retained earnings. Option D is incorrect as there is no liability to stockholders incurred by a stock dividend. Therefore, the correct answer is B, a reduction in retained earnings of $2,590,000.

Question 19

To qualify as an extraordinary item, a gain or loss must:

Accepted Answer

In order to qualify as an extraordinary item, a gain or loss must be both material and unusual in nature, and not expected to recur in the future. These items should be reported separately in the income statement, after continuing operations and before net income, but they should not necessarily be larger in amount than other items in the income statement. Additionally, while a segment of the business being discontinued can result in extraordinary items, it is not the only way for an item to qualify as extraordinary.

Question 20

In computing earnings per share, the number of shares used is:

Accepted Answer

The weighted average of shares outstanding for the year is the best choice as it takes into account any changes in the number of shares outstanding throughout the year, such as stock splits or issuance of new shares. This method provides a more accurate representation of the number of shares outstanding during the period in question.

Quiz 12: Income and Changes in Retained Earnings