karoliukas

To be classified as an extraordinary item on the income statement under U.S. GAAP, the item must be:

A) unusual in nature and infrequent in occurrence.

B) probable and infrequent in nature.

C) estimated and probable.

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Extraordinary items are unusual and infrequent events that are reported separately, net of tax "below the line." Examples are expropriations by foreign governments and uninsured losses from earthquakes, eruptions, and tornadoes.

karoliukas

Extraordinary items are:

A) unusual in nature and infrequent.

B) unusual in nature or infrequent.

C) related to the normal course of business.

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Extraordinary items are unusual and infrequent items reported below the line net of taxes. “Below the line” means after net income from continuing operations but before net income.- Discontinued operations are reported below the line net of taxes.  - Unusual or infrequent items are unusual or infrequent, but not both. They appear (a separate line item) as a component of net income from continuing operations that must be removed if not deemed to be a component of persistent income. They are reported above the line before taxes.  - Changes in accounting principle are reported below the line net of taxes.  
- Accounting errors go directly to retained earnings.

karoliukas

Which of the following statements regarding making changes in accounting principles is least accurate?

A) Changes in accounting estimates are now treated the same as changes in accounting principles.

B) A change in accounting principle is a change from one generally accepted accounting principle to another generally accepted principle. The firm making the change must justify the change.

C) The general rule is retrospective application.

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Changes in accounting estimates are not treated the same as changes in principles. Changes in principles are treated retrospectively, whereas changes in accounting estimates are accounted for in the current and future periods. Both remaining statements are accurate.

karoliukas

Extraordinary items are:

A) unusual or infrequent.

B) unusual and infrequent.

C) reported above the line.

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Extraordinary items are unusual and infrequent, reported below the line separate from income from continuing operations on the income statement, and would include such items as: foreign government confiscation, earthquake damages, losses from volcanic eruptions, etc.

mouse123

Are changes in accounting principles and extraordinary items treated similarly in accordance with U.S. Generally Accepted Accounting Principles and International Financial Reporting Standards?

Accounting principles

Extraordinary items

A) No No

B) Yes Yes

C) Yes No

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Treatment of a change in an accounting principle is similar under U.S. GAAP and IFRS. Under both standards, a change in accounting principle is made retrospectively. The treatment of extraordinary items differs between U.S. GAAP and IFRS. Under U.S. GAAP, extraordinary items are reported net of tax below income from continuing operations. IFRS does not permit firms to treat transactions as extraordinary in the income statement.

mouse123

During 2004, Covax Corp. reported net income of $2.4 million and 2 million shares of common stock. Covax paid cash dividends of $14,000 to its preferred shareholders and $30,000 to its common shareholders. In 2004, Covax issued 900, $1,000 par, 5.5 percent bonds for $900,000. Each bond is convertible to 50 shares of common stock. Assume the tax rate is 40%. Compute Covax’s basic and diluted EPS.

Basic EPS

Diluted EPS

A) $1.19 $1.18

B) $1.19 $1.22

C) $1.22 $1.22

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2004 Basic EPS:

2004 Diluted EPS:

mouse123

Selected information from Able Company’s financial activities is as follows:

• Net Income was $720,000.
• 1,000,000 shares of common stock were outstanding on January 1.
• 1,000 shares of 8%, $1,000 par value preferred shares were outstanding on January 1.
• The tax rate was 40%.
• The average market price per share for the year was $20.
• 6,000 shares of 3%, $500 par value preferred shares, convertible into common shares at a rate of 40 common shares for each preferred share, were outstanding for the entire year.

Able’s basic and diluted earnings per share (EPS) are closest to:

Basic EPS

Diluted EPS

A) $0.55 $0.52

B) $0.55 $0.55

C) $0.64 $0.64

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Able’s basic earnings per share ((Net Income − Preferred Stock Dividends) / weighted average shares outstanding) for 2004 was [($720,000 − ($500 × 6,000 × 0.03) − ($1,000 × 1,000 × 0.08)] / 1,000,000 = $0.55. If the convertible preferred were converted to common stock on January 1, 6,000 × 40 = 240,000 additional shares would have been issued. Also, dividends on the convertible preferred would not have been paid.
So diluted EPS was ($720,000 − 80,000) / (1,000,000 + 240,000) = $0.52.

mouse123

Lawson, Inc.’s net income for the year was $1,060,000 with 420,000 shares outstanding. Lawson has 2,000 shares of 8%, $1,000 par value convertible preferred stock that were outstanding the entire year. Each share of preferred is convertible into 50 shares of common stock. Lawson's diluted earnings per share are closest to:

A) $2.04.

B) $1.94.

C) $2.14.

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Lawson’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding) is ($1,060,000 – (2,000 × $1,000 × 0.08)) / 420,000 = $2.14. To calculate diluted EPS the convertible preferred shares are presumed to have been converted, the preferred dividends paid are added back to the numerator of the EPS equation, and the additional common shares are added to the denominator of the equation. Lawson’s diluted EPS is $1,060,000 / (420,000 + 100,000) = $2.04.

mouse123

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.

mouse123

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) $0.90.

B) $1.74.

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.