Reading 32: Understanding the Income Statement LOS G习题精选 2010, structure, capital, simple

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LOS g, (Part 1): Describe the components of earnings per share.

For an organization with a simple capital structure, the computation of earnings per share is least likely to consider:

A) net income.

B) the weighted average number of preferred shares outstanding.

C) the weighted average number of common shares outstanding.

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The equation for Basic EPS (net income – preferred dividends / weighted average number of common shares outstanding) does not include the number of preferred shares outstanding, because the objective is to determine the earnings available to the common shareholder.

 

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Savannah Corp.’s financial accounts for the year ended December 31 included the following information:

• Net Income: $122,000
• Preferred Stock Dividends Paid: $35,000
• Common Stock Dividends Paid: $42,000
• Common Shares outstanding at January 1: 50,000
• 10% preferred $100 par value shares outstanding at January 1: 3,500

No stock transactions occurred during the year and all preferred stock dividends were paid. Basic earnings per share for Savannah are closest to:

A) $1.74.

B) $0.90.

C) $2.44.

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Savannah Corp.’s basic EPS ((net income – preferred dividends) / weighted average number of common shares outstanding) was (($122,000 ? $35,000) / $50,000 =) $1.74.

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Sampson Corp. had 500,000 shares of common stock outstanding at the beginning of the year.  The average market price was $20.

• On April 1, Sampson issued 100,000 shares of $1000 par value 10 percent preferred stock.
• On July 1, Sampson issued 200,000 warrants to purchase 10 shares of common stock  each at $22 per share.
• On October 1, Sampson repurchased 60,000 of common stock as treasury stock for $15 per share.

The weighted average common shares outstanding Sampson should use to compute basic earnings per share (EPS) was:

A) 515,000.

B) 600,000.

C) 485,000.

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Only the October 1 transaction affects the weighted average common shares outstanding because the April 1 transaction would not affect the number of shares outstanding and the July 1 transaction involves warrants which would not be included in the basic EPS calculation. The computation for basic EPS is [(500,000 × 12) ? (60,000 × 3)] / 12 = 485,000.

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Which of the following securities would least likely be found in a simple capital structure?

A) 6%, $5000 par value putable bond.

B) 7%, $100 par value non convertible preferred.

C) 3%, $100 par value convertible preferred.

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A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock.

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A complex capital structure, for purposes of determining disclosure of diluted Earnings Per Share, is distinguished from a simple capital structure by the:

A) company having issued warrants, convertible securities, or options.

B) company's use of debt to finance its operations.

C) company having preferred stock outstanding.

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A complex structure contains potentially dilutive securities such as options warrants or convertible securities. Where as simple capital structures contain no potentially dilutive securities and contains only common stock and non-convertible securities.

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Jersey, Inc.’s financial information included the following for its year ended December 31:

• 160,000 shares of common stock were outstanding for the entire year.
• 18,000 shares of 10%, $100 par value cumulative preferred stock were outstanding for the entire year.
• Common stock dividends paid during the current year were $240,000.
• All preferred stock dividends were paid for the current year.
• Net income was $720,000.

Basic earnings per share for Jersey, Inc. for the year ended December 31 are closest to:

A) $4.50.

B) $3.38.

C) $2.81.

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Jersey, Inc.’s basic EPS = (net income – preferred dividends) / (weighted average number of common shares outstanding) was ($720,000 - $180,000)/160,000 = $3.38.

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Which type of a capital structure contains no dilutive securities?

A) Basic.

B) Complex.

C) Simple.

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A complex capital structure contains potentially dilutive securities such as options, warrants, or convertible securities. There is no basic capital structure but there are basic earnings per share which does NOT consider the effects of any dilutive securities in the computation of EPS.

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A firm with a capital structure consisting of only common stock and non-convertible bonds is said to have a:

A) non-diluted capital structure.

B) straight capital structure.

C) simple capital structure.

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A simple capital structure is one that contains no securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

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A complex capital structure would typically contain:

A) variable rate notes.

B) convertible bonds.

C) bank notes.

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A complex capital structure is one that contains securities that have the potential to dilute a firm’s earnings per share. For example, convertible bonds, convertible preferred stock, options, and warrants have the potential to dilute earnings per share upon conversion or exercise.

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The SSP Company had 5 million shares outstanding on January 1. On February 15 the board of directors approved a 3:2 stock split, effective April 1. What is the weighted average number of shares outstanding for the SSP Company for year-end?

A) 6,875,000 shares.

B) 7,500,000 shares.

C) 5,625,000 shares.

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Stock splits and stock dividends are applied to all shares that existed at the beginning of the period and shares that were issued or repurchased during the period, but prior to the split or dividend. For SSP, the 5 million beginning-of-year shares outstanding are adjusted to 7.5 million shares (5.0 × 3/2) as a result of the 3:2 split.