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标题: Financial Reporting and Analysis 【Reading 25】Sample [打印本页]
作者: karoliukas    时间: 2012-3-26 11:23     标题: [2012 L1] Financial Reporting and Analysis 【Session 8 - Reading 25】Sample

Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?
Increase in
raw materials cost 		Increase in
marketing expense
A)
Yes No
B)
No Yes
C)
Yes Yes


Gross profit is equal to sales minus cost of goods sold. Cost of goods sold includes the direct costs of producing a product or service such as raw materials, direct labor, and overhead (fixed costs). Thus, an increase in raw materials costs will result in higher cost of goods sold and lower gross profit. Marketing expenses are considered operating expenses (SG&A), not in cost of goods sold.
作者: karoliukas    时间: 2012-3-26 11:24

Do gains and losses, as well as expenses appear on the income statement?
A)
Only expenses appear on the income statement.
B)
Only gains and losses appear on the income statement.
C)
Both appear on the income statement.


Gains and losses result from, transactions that are not a part of the firm’s normal business operations. Expenses are amounts that are incurred to generate revenue; thus, expenses result from the firm’s ongoing operations. Both are included on the income statement.
作者: karoliukas    时间: 2012-3-26 11:24

During 2007, Topeka Corporation entered into the following transactions:

Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account.
Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?
A)
Only one should be recognized.
B)
Neither should be recognized.
C)
Both should be recognized.


Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is relected on the statement of changes in stockholders’ equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.
作者: karoliukas    时间: 2012-3-26 11:25

In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when:
A)
the contracts are of a relatively short duration (less than one year).
B)
estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.
C)
lack of dependable cost estimates cause forecasts to be doubtful.


In accounting for long-term construction contracts, the percentage-of-completion method is preferable to the completed contract method when estimates of the costs to complete and the extent of progress toward completion are reasonably dependable.
作者: karoliukas    时间: 2012-3-26 12:53

An airplane manufacturing company routinely builds fighter jets for the U.S. armed forces. It takes fourteen months to build one jet, and the government pays for them in installments over the fourteen-month period. Which revenue recognition method should be used?
A)
Percentage-of-completion method.
B)
Installment sales method.
C)
Completed contract method.


The percentage-of-completion method is appropriate in this case because payment is assured when dealing with the U.S. government, and cost and price estimates are assumed reliable due to the ongoing and routine nature of the contract.
作者: karoliukas    时间: 2012-3-26 12:53

If a reliable estimate of total costs of the contract does not exist, which of the following revenue recognition methods should be used?
A)
Cost recovery method.
B)
Percentage-of-completion method.
C)
Completed contract method.


The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.
The percentage-of-completion method is used when ultimate payment is assured and revenue is earned as costs are incurred. Profit is recognized corresponding to the percentage of costs incurred to the total estimated.
作者: karoliukas    时间: 2012-3-26 12:54

When evaluating the differences between two revenue recognition policies, an analyst should view the policy as more conservative which:
A)
results in less leverage on the balance sheet.
B)
recognizes revenue later.
C)
is more dependent on management estimates.


Recognizing revenue later rather than sooner is considered more conservative. More aggressive (less conservative) revenue recognition can result in less leverage by increasing assets.
作者: karoliukas    时间: 2012-3-26 12:54

Information about a company’s revenue recognition policies is most likely disclosed in:
A)
the standard auditor’s report.
B)
the financial statement notes.
C)
Management’s Discussion and Analysis.


Revenue recognition policies are disclosed in the footnotes to the financial statements.
作者: karoliukas    时间: 2012-3-26 12:54

Jerry Krome, CFA, is an equity analyst. The head of research at Krome’s firm composes a memo that contains the following statements:
With regard to the implications of revenue recognition policies for financial analysis, Krome should agree with:
A)
only one of these statements.
B)
both of these statements.
C)
neither of these statements.


Because revenue recognition often relies on judgment and estimates from management, it is not always possible to calculate the appropriate adjustments that would account for the differences between companies’ revenue recognition policies. An analyst should use the policies disclosed in companies’ financial statement footnotes to understand the degree to which their revenue recognition is conservative or aggressive. In general, recognizing revenue sooner is considered aggressive and recognizing revenue later is considered conservative.
作者: karoliukas    时间: 2012-3-26 12:55

Which revenue recognition method is used when the payment is assured and revenue is earned as costs are incurred?
A)
Percentage-of-completion method.
B)
Installment sales method.
C)
Cost recovery method.


The installment sales method is used when the assurance of payment and estimated bad debts does not exist before cash is collected. Sales revenue and COGS are recognized only when cash is received.
The cost recovery method is used when future cash collections are not assured even after receipt of partial payments. Gross profit is not recognized until all of the cost of goods sold is collected.
作者: karoliukas    时间: 2012-3-26 12:55

An oil exploration company has been contracted to dig 100 exploratory holes for $200,000. The cost to complete this job is estimated to be $150,000, but the company doesn’t recognize any of the $50,000 profit until the job is completed. Which revenue recognition method is being used?
A)
Cost recovery method.
B)
Percentage-of-completion method.
C)
Completed contract method.


The completed contract method doesn't recognize revenue and expense until the contract is completed. The percentage-of-completion method would have recognized a portion of the $50,000 profit prior to completion.
作者: karoliukas    时间: 2012-3-26 12:55

Which, if any, of the following statements about the installment sales method and cost recovery method is correct? Statement 1: The cost recovery method recognizes revenue and associated costs of goods sold only when cash is received, based on gross profit margin. Statement 2: The installment sales method recognizes sales when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.
A)
Only one of these statements is correct.
B)
Both statements are correct.
C)
Neither statement is correct.


Neither statement is correct because the definitions are reversed.
作者: karoliukas    时间: 2012-3-26 12:56

When a reliable estimate of costs exists, ultimate payment is assured, and revenue is earned as costs are incurred, which of the following revenue recognition methods should be used?
A)
Percentage-of-completion method.
B)
Cost recovery method.
C)
Installment sales method.


The installment sales method recognizes revenue and associated cost of goods sold only when cash is received. Gross profit (sales – cost of goods sold) reflects the proportion of cash received.
The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.
作者: karoliukas    时间: 2012-3-26 12:56

When an unreliable estimate of costs exists and ultimate payment is assured, which of the following revenue recognition methods should be used?
A)
Percentage-of-completion method.
B)
Completed contract method.
C)
Cost recovery method.


The key word is "unreliable." The completed contract method is used when cost estimates are unreliable. The percentage-of-completion method recognizes profit corresponding to the percentage of cost incurred to total estimated costs associated with long-term construction contracts. Percent-of-completion is used where contracts and cost estimates are reliable.
The cost recovery method is similar to the installment sales method but is more conservative. Sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.
作者: karoliukas    时间: 2012-3-26 12:56

Cash collection is a critical event for income recognition under the:
Cost-Recovery MethodInstallment Method
A)
YesYes
B)
No Yes
C)
YesNo


Recognition of income depends on cash collected under both methods.
作者: karoliukas    时间: 2012-3-26 12:57

According to the installment method of accounting, gross profit on an installment sale is recognized:
A)
in proportion to the cash collection.
B)
after cash collections equal to the cost of sales have been received.
C)
on the date the final cash collection is received.


The installment sales method recognizes sales and COGS in proportion to cash collections.
作者: karoliukas    时间: 2012-3-26 12:57

An analyst has gathered the following data pertaining to Hegel Company’s construction projects, which began during 2002:
Project 1Project 2
Contract price$420,000$300,000
Costs incurred in 2002240,000280,000
Estimated costs to complete120,00040,000
Billed to customers during 2002150,000270,000
Received from customers during 200290,000250,000

If Hengel used the completed contract method, what amount of gross profit (loss) would Hengel report in its 2002 income statement for:
Project 1Project 2
A)
$0($20,000)
B)
$0$0
C)
($20,000)$0


No profit is recognized until the completion of the project, however losses are recognized. Project 2 has an expected loss of $20,000.
If Hengel used the percentage-of-completion method, what amount of gross profit (loss) would Hengel report in its 2002 income statement?
A)
$20,000.
B)
$22,500.
C)
$(20,000).

Under the percentage of completion method, $40,000 of profit is recognized for project 1. 120,000 + 240,000 = 360,000 total costs; 240,000 / 360,000 × 60,000 estimated profit = $40,000 profit.
Project 2 is running at a $20,000 loss. If the loss can be estimated the loss must be recognized at the time it is estimated. Total revenue for project 2 = 300,000 contract price − 320,000 total costs = -$20,000 estimated loss
40,000 (project 1) − 20,000 (project 2) = $20,000 gross profit in 2002
作者: karoliukas    时间: 2012-3-26 12:57

The calculation of the income recognized in the third year of a five-year construction contract accounted for using the percentage-of-completion method includes the ratio of:
A)
costs incurred in year 3 to total estimated costs.
B)
costs incurred in year 3 to total billings.
C)
total costs incurred to total estimated cost.


The percentage of completion method recognizes revenues in proportion to the proportion of expenses incurred. Using only the current year's costs produces an incorrect result if the estimated total cost has changed. Revenue recognized in any given year is costs to date divided by total estimated costs, times total estimated revenue for the project, minus revenue that has already been recognized.
作者: karoliukas    时间: 2012-3-26 12:58

Which of the following statements regarding the methods of revenue recognition is most accurate? In the first year of a long-term contract:
A)
the percentage-of-completion method generally results in lower retained earnings than the completed contract method.
B)
the completed contract method is used when the selling price or cost estimates are unreliable.
C)
the completed contract method, in comparison to the percentage-of-completion method, will generally result in higher net income.


The completed contract method compared to the percentage-of-completion method will result in lower net income in the first year because revenue and profit are recognized later. Hence, retained earnings will also be lower than the percentage-of-completion method.
作者: karoliukas    时间: 2012-3-26 12:58

JME Construction always uses the percentage of completion method of recognizing revenue. During 2004 JME signs a contract in the amount of $10 million with the following data available:

Costs incurred to date
$2,200,000

Billings to date
$2,000,000

Cash collected
$1,750,000

Total cost of project
$8,800,000

How much gross profit should JME recognize for 2004?
A)
-$200,000.
B)
-$450,000.
C)
$300,000.


stage of completion = 25%(2.2 / 8.8)
revenue to be recognized = 0.25 × 10 million = 2.5 million
gross profit = 2.5 million − 2.2 million = 300,000
作者: karoliukas    时间: 2012-3-26 12:58

Walker Company received a letter in November 2003 indicating that Johnson, Inc. would purchase a specialty machine priced at $4,000,000. In February 2004, a binding contract was executed for the machine’s construction. Materials costing $2,000,000 were ordered in December 2003, arrived with an invoice in August 2004, and were used in the manufacturing process in the first quarter of 2005. Walker completed and delivered the machine in December 2006. Johnson received the first invoice in 2007 and paid the $4,000,000 purchase price in 2007. Walker Company uses the accrual method of accounting. Walker should record the materials used to construct the machine as expenses in the year:
A)
2007.
B)
2004.
C)
2006.


Under the accrual concept, income is recognized when the earning activities are substantially completed, risk of ownership has transferred from buyer to seller, and payment is realizable and collectible. Under the matching principle, expenses incurred that directly relate to the sold item are expensed in the same period as the revenue is recognized.
作者: karoliukas    时间: 2012-3-26 12:59

Under the cost recovery method, profit is recognized:
A)
at time of delivery.
B)
as collection occurs.
C)
after the amount of cost has been collected.


The cost recovery method is used when the costs to provide goods or services are not known. Under this method, sales are recognized when cash is received, but no gross profit is recognized until all of the cost of goods sold is collected.
作者: karoliukas    时间: 2012-3-26 12:59

Which of the following is NOT a requirement for revenue recognition to occur?
A)
Cash must have been received.
B)
Earning activities are substantially completed.
C)
Transactions giving rise to revenue should be arms-length.


Revenue from credit sales may be recognized when sales are on account.
Other conditions when revenues are also considered earned include when: revenue can be measured with reasonable accuracy, transactions are not subject to revocation, it is possible to measure the cost of provided goods (no significant contingent obligation), and there is assurance of payment (cash) or collectability.
作者: karoliukas    时间: 2012-3-26 12:59

Guidance from the U.S. Securities and Exchange Commission regarding the criteria for revenue recognition least likely specifies that there must be:
A)
evidence of an arrangement between the buyer and the seller.
B)
reasonable assurance that the product will be delivered or the service will be rendered.
C)
a determined or determinable price.


One of the SEC’s criteria for revenue recognition is that the product has been delivered or the service has been rendered. The other criteria are evidence of an arrangement between the buyer and seller; the price has been determined or is determinable; and the seller is reasonably assured of collecting money.
作者: karoliukas    时间: 2012-3-26 13:00

As a general rule, revenue is normally recognized when it is:
A)
earned.
B)
realizable and earned.
C)
measurable.


Under the accrual concept, revenue is recognized when the earnings process is completed (earned) and ultimate realization (cash receipt) is assured.
作者: karoliukas    时间: 2012-3-26 13:00

Under the general principles of accrual accounting, revenue is recognized when:
A)
cash is received, and expenses are recognized when cash is paid.
B)
the good or service is delivered or cash is received, whichever is earlier.
C)
earned, and expenses are recognized when incurred.


The principle of accrual accounting is that revenue is recognized when earned, and expenses are recognized when incurred.
作者: karoliukas    时间: 2012-3-26 13:00

When the cost of goods and services used are recognized as an expense in the same period that its generated revenue is recognized, which of the following principle(s) is (are) being described?
A)
The matching and accrual principles.
B)
The accrual and expense recognition principles.
C)
The matching principle for revenue and expense recognition.


The accrual concept states that revenue is recognized when the earnings process is completed and cash receipt is assured.
作者: karoliukas    时间: 2012-3-26 13:02

Under accrual accounting, revenues are recognized in the same period in which the associated:
A)
cash is collected.
B)
expenses are incurred.
C)
invoices are billed.


Accrual accounting is based on the matching principle, under which revenues are recognized in the same period that the expenses are incurred to generate those revenues.
作者: karoliukas    时间: 2012-3-26 13:02

In its first year of business, Digmore Corporation’s balance sheet shows gross fixed assets at $90 million and accumulated depreciation of $10 million. If the estimated salvage value of these assets is $10 million, and the original estimated useful life is 8 years, what method of depreciation did Digmore most likely use?
A)
Units of production.
B)
Straight Line.
C)
Double-declining-balance.


$90 − $10 million = $80 million; $80 million / 8 = $10 million depreciation per year under Straight Line depreciation.
作者: karoliukas    时间: 2012-3-26 13:02

A video rental store with a large inventory of newly released movies is attempting to determine an appropriate method of depreciation for its movies for rental. As well, it is trying to determine an appropriate method of determining the cost of its inventory of movies for sale. Which of the following treatments is most appropriate for the movies for rental and movies for sale?
Movies for rental Movies for sale
A)
Straight-line depreciation Last-in, first-out
B)
Accelerated depreciation First-in, first-out
C)
Accelerated depreciation Last-in, first-out

With the movies for rental, a greater portion of the decrease in the value of newly released movies would reasonably be realized in the first year, given the rapid rate of obsolescence in view of the large number of movies available. Therefore, depreciating this pool of assets by a greater amount in the first year using an accelerated depreciation method better approximates economic depreciation than depreciating it straight line.
With the movies for sale, there are two methods available for accounting as inventory. FIFO is appropriate for inventory that has a limited shelf life and LIFO is appropriate for inventory that does not deteriorate with age. Because the movies have a very limited shelf life and will greatly deteriorate in value with age, especially after the first year, FIFO is the most appropriate method of accounting for the movies for sale.
作者: karoliukas    时间: 2012-3-26 13:03

The First National Bank is a commercial bank that specializes in consumer financing, particularly automobile loans. The majority of the loans are funded from customer deposits. In addition, the bank purchases various investment securities with available cash. The investments are debt securities and have an average maturity date of less than 30 days. Should First National Bank report the interest received from the consumer loans and the interest received from the investment securities as an operating or as a nonoperating component in its year-end income statement?
Consumer loans Investment securities
A)
Operating Operating
B)
Operating Nonoperating
C)
Nonoperating Operating


Interest received from customers and interest received from investments are a part of normal operations of a financial institution. Thus, the First National Bank will report the interest income from both sources as components of operating income.
作者: karoliukas    时间: 2012-3-26 13:03

Red Oak Corporation is a furniture manufacturer located in Canada. Red Oak is financed with a combination of debt and equity. The debt consists of unsecured zero-coupon bonds that mature in 20 years. For income tax purposes, interest on the bonds is deductible when accrued. Red Oak’s equity consists of common stock and preferred stock. No dividends have ever been paid on Red Oak’s common stock; however, dividends are paid quarterly to the preferred shareholders. Should the accrued interest on the zero-coupon bonds and the dividends paid to the preferred shareholders be reported as a nonoperating component of Red Oak’s net income?
Accrued interest Preferred dividends
A)
Yes Yes
B)
Yes No
C)
No Yes


Since Red Oak is a nonfinancial firm, the accrued interest is considered a nonoperating activity, related to how the firm is financed. Dividends paid to preferred shareholders do not affect net income.
作者: karoliukas    时间: 2012-3-26 13:03

Pinto Corporation is an automobile manufacturer located in North America. Pinto owns a 5 percent interest in one of its suppliers, Continental Supply Company. Each year, Pinto receives a cash dividend from Continental. Pinto’s engine supplier, National Supply Company, recently increased prices on goods sold to all customers due to higher labor costs. Should Pinto report the dividends received from Continental and the price increase from National as an operating or nonoperating component on its year-end income statement?
A)
Both are nonoperating.
B)
Only one is operating.
C)
Both are operating.


Since Pinto is a nonfinancial firm, dividends received would be considered a nonoperating component. An increase in cost of goods sold would be considered a part of normal operations.
作者: karoliukas    时间: 2012-3-26 13:04

On January 1, 2007, Sneed Corporation purchased machinery costing $8 million with a salvage value of $1 million. For the year ended 2007, Sneed recognized depreciation expense of $3.2 million from the machinery using the double-declining-balance method. Should the depreciation expense be reported as an operating component in the income statement, and what is the estimated useful life of the machinery?
Operating expense Useful life
A)
No 5 years
B)
Yes 4 years
C)
Yes 5 years


Depreciation expense is reported as an operating component in the income statement. Given the first year depreciation expense of $3.2 million, and the original cost of $8 million, the declining balance percentage is 40% ($3.2 million depreciation expense / $8 million cost). The double declining balance percentage is equal to 2 / useful life = 40%. Thus, the useful life is 5 years (2 / 0.40).
作者: karoliukas    时间: 2012-3-26 13:04

Changes in asset lives and salvage value are changes in accounting:
A)
principle and specific disclosures are required.
B)
estimates and specific disclosures are required.
C)
estimates and no specific disclosures are required.


Changes in asset lives and salvage value are changes in accounting estimates and are not considered changes in accounting principle. No specific disclosures are required.
作者: karoliukas    时间: 2012-3-26 13:04

Retrospective presentation is least likely required for a change from:
A)
percentage-of-completion to completed contract revenue recognition.
B)
LIFO to average cost inventory valuation.
C)
zero salvage value to positive salvage value.


Changes in accounting principle require retrospective presentation. A change in the salvage value of an asset is a change in accounting estimate, which does not apply retrospectively.
作者: karoliukas    时间: 2012-3-26 13:04

All the following items are reported net of taxes below net income from continuing operations on the income statement EXCEPT:
A)
extraordinary items.
B)
unusual or infrequent items.
C)
expropriations by foreign governments.


Unusual or infrequent items appear as a component of net income from continuing operations and are reported "above the line." Extraordinary items, such as expropriations, are unusual and infrequent and appear "below the line."
作者: karoliukas    时间: 2012-3-26 13:05

Which of the following is least likely reported net of tax on the income statement under U.S. GAAP?
A)
Income from discontinued operations.
B)
Extraordinary items.
C)
Interest expense.


Interest expense would be considered an expense that is incurred from continuing operations and, therefore, is listed prior to subtracting the income tax expense on the income statement. Income from discontinued operations and extraordinary items are included on the income statement after the net income from continuing operations is reported and after the income tax expense from continuing operations is reported. Therefore, these latter accounts are reported net of tax.
作者: karoliukas    时间: 2012-3-26 13:05

Which of the following statements regarding the income statement is least accurate?
A)
Items that are unusual in nature or infrequent in occurrence appear below income from continuing operations on a pretax basis.
B)
Extraordinary items are both unusual in nature and infrequent in occurrence. Extraordinary items are disclosed net of taxes after income from continuing operations in the income statements.
C)
The results of discontinued operations are reported below income from continuing operations on the income statement net of taxes.


The key word here is "or." Unusual or infrequent items are unusual orinfrequent, but NOT both. These items are reported (as a separate line item) as a component of net income from continuing operations.
Examples of unusual or infrequent items include:
作者: karoliukas    时间: 2012-3-26 13:06

Which of the following items regarding the corporate income statement is most accurate?
A)
Unusual or infrequent items appear in the income statement of a corporation as a component of net income from continuing operations.
B)
Examples of extraordinary items include expropriations of property and equipment by foreign governments, losses from earthquakes and tornados, and gains from the sale of investments in subsidiaries.
C)
If a corporation disposes of a business segment that is separable from the company's core business activities, the results of the discontinued segment are reported as a separate line item below income from continuing operations on a pre-tax basis.

Explanations for incorrect answers are as follows:
作者: karoliukas    时间: 2012-3-26 13:06

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.


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.
作者: karoliukas    时间: 2012-3-26 13:07

Extraordinary items are:
A)
unusual in nature and infrequent.
B)
unusual in nature or infrequent.
C)
related to the normal course of business.


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.
作者: karoliukas    时间: 2012-3-26 13:08

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.


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.
作者: karoliukas    时间: 2012-3-26 13:09

Extraordinary items are:
A)
unusual or infrequent.
B)
unusual and infrequent.
C)
reported above the line.


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.
作者: mouse123    时间: 2012-3-26 13:16

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


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.
作者: mouse123    时间: 2012-3-26 13:17

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


2004 Basic EPS:

2004 Diluted EPS:
作者: mouse123    时间: 2012-3-26 13:17

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


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.
作者: mouse123    时间: 2012-3-26 13:17

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.


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.
作者: mouse123    时间: 2012-3-26 13:18

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.


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.
作者: mouse123    时间: 2012-3-26 13:18

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


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.
作者: mouse123    时间: 2012-3-26 13:19

Oregon Corp.’s stock transactions during the year were as follows:
What is Oregon’s weighted average number of shares outstanding?
A)
197,500.
B)
167,500.
C)
250,000.


The January 1 balance is adjusted retroactively for the reverse stock split and 320,000 / 2 = 160,000 shares are treated as outstanding from January 1. Issuance of stock is included from the date of issuance. The weighted average shares are computed by multiplying the share amounts by the number of months the shares were outstanding, then adding these amounts and dividing the sum by 12.
January 1:initial shares160,000 × 12 =1,920,000
July 1:Smith acquisition60,000 × 6 =360,000
October 1:cash issuance30,000 × 3 =90,000
Total:2,370,000

Oregon’s weighted average shares = 2,370,000 / 12 = 197,500.
作者: mouse123    时间: 2012-3-26 13:19

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


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.
作者: mouse123    时间: 2012-3-26 13:19

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.


A simple capital structure contains no potentially dilutive securities such as stock options, warrants, or convertible preferred stock.
作者: mouse123    时间: 2012-3-26 13:20

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.


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.
作者: mouse123    时间: 2012-3-26 13:20

Bluff, Inc.’s stock transactions during the year were as follows:
What is Bluff’s weighted average number of shares outstanding during the year?
A)
105,500.
B)
98,000.
C)
101,000.


Initial shares: 90,000 × 1.20 =108,000
– Reacquired treasury shares: 10,000 × 3/12 =–2,500
105,500
作者: mouse123    时间: 2012-3-26 13:20

Jersey, Inc.’s financial information included the following for its year ended December 31:
Basic earnings per share for Jersey, Inc. for the year ended December 31 are closest to:
A)
$3.38.
B)
$4.50.
C)
$2.81.


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.
作者: mouse123    时间: 2012-3-26 13:21


Juniper Corp’s stock transactions during the year 20X4 were as follows:
When computing for earnings per share (EPS) computation purposes, what was Juniper’s weighted average number of shares outstanding during 20X4?
A)
930,000.
B)
735,000.
C)
870,000.


The January 1 balance is adjusted retroactively for the stock dividend and (540,000 × 1.5) = 810,000 shares are treated as outstanding from January 1. The weighted average number of shares is computed by multiplying the shares by the number of months held, as follows:

January 1
Initial shares

(810,000 × 12) =

9,720,000


July 1
Reacquired shares

(-180,000 × 6) =

1,080,000


October 1
Reissued shares

(60,000 × 3) =

180,000




8,820,000


Weighted average shares was (8,820,000 / 12) = 735,000 shares.
作者: mouse123    时间: 2012-3-26 13:21

Which type of a capital structure contains no dilutive securities?
A)
Simple.
B)
Basic.
C)
Complex.


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.
作者: mouse123    时间: 2012-3-26 13:21

A firm with a capital structure consisting of only common stock and non-convertible bonds is said to have a:
A)
simple capital structure.
B)
non-diluted capital structure.
C)
straight capital structure.


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.
作者: mouse123    时间: 2012-3-26 13:22

A complex capital structure would typically contain:
A)
convertible bonds.
B)
variable rate notes.
C)
bank notes.


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.
作者: mouse123    时间: 2012-3-26 13:22

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.


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.
作者: mouse123    时间: 2012-3-26 13:22

Zimmer Co. had the following common shares outstanding:Calculate the weighted average number of common shares outstanding for 2003 and 2004.
20032004
A)
55,000124,500
B)
55,000146,500
C)
10,000124,000


For year 2003:
50,000 × 12 = 600,000
20,000 × 3 = 60,000
660,000/12 = 55,000
For year 2004:
70,000 × 1.1 × 2 = 154,000 × 12 = 1,848,000
(30,000) × 3 = (90,000)
1,758,000 / 12 = 146,500
作者: mouse123    时间: 2012-3-26 13:23

At the beginning of this year Aristotle Co. had 400,000 shares of common stock outstanding. During the year, Aristotle paid a 10 percent stock dividend on May 31, issued 90,000 new common shares on June 30, and repurchased 12,000 shares on December 1. The number of shares Aristotle should use in computing earnings per share at the end of the year is:
A)
475,000.
B)
484,000.
C)
476,000.


[400,000 shares × 12 months + 40,000 × 12 months + 90,000 × 6 months - (12,000 × 1 months)] divided by 12 = 484,000 shares.
作者: mouse123    时间: 2012-3-26 13:23

Robinson Company had 1 million shares outstanding at the beginning of the year. On April 1, Robinson issued an additional 300,000 shares. On July 1, Robinson issued 200,000 more shares. What is Robinson's weighted average number of shares outstanding for the calculation of earnings per share?
A)
1,500,000 shares.
B)
1,200,000 shares.
C)
1,325,000 shares.


Weighted average shares = 1,000,000 + (0.75) 300,000 + (0.5) 200,000 = 1,325,000 shares
作者: mouse123    时间: 2012-3-26 13:23

At the beginning of 2004, Osami Corporation had 1.4 million shares of common stock outstanding and no preferred stock. At the end of August 2004, Osami issued 1.2 million new shares of common stock. If Osami reported net income equal to $7.2 million, what were its earnings per share (EPS) for 2004?
A)
$4.00.
B)
$3.33.
C)
$2.77.


The new shares were only outstanding 4 months of the year. Thus, the weighted average number of shares outstanding is [1.4 + (4/12)(1.2)] million = 1.8 million shares. So basic EPS = $7.2 million / 1.8 million = $4.00.
作者: mouse123    时间: 2012-3-26 13:24

The following information pertains the QRK Company:
What is the number of shares that should be used to compute 2005 earnings per share for the QRK Company?
A)
2.5 million.
B)
1.9 million.
C)
1.6 million.


The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. For the QRK Company, the weighted number of shares outstanding is the original one million shares plus 150,000 shares for the end-of-March issue (= 200,000 × 9/12), plus 250,000 shares for the end-of-June issue (= 500,000 × 6/12), plus 200,000 shares for the end-of-September issue (= 800,000 × 3/12), or 1.6 million shares.
作者: mouse123    时间: 2012-3-26 13:24

The ZZT Company went public on June 1, 2004, by issuing 25 million shares of common stock. In 2005, the firm raised additional capital by issuing 2 million shares of preferred stock. What is the weighted average number of common shares outstanding for the year ending December 31, 2005?
A)
14,583,333.
B)
25,000,000.
C)
10,416,667.


The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Since no new common shares were issued in 2005, and there were 25 million shares at the end of 2004, there are 25 million shares at the end of 2005. Note that the preferred stock shares do not affect the common shares outstanding.
作者: mouse123    时间: 2012-3-26 13:24

A simple capital structure is least likely to include:
A)
treasury stock.
B)
convertible bonds.
C)
callable preferred stock.


Simple capital structures do not include any potentially dilutive securities (a security that could decrease earnings per share if exercised). Convertible bonds are potentially dilutive.
作者: mouse123    时间: 2012-3-26 13:24

Ajax Company has a simple capital structure. Which of the following will NOT be found on its balance sheet?
A)
6%, $50 par value callable bond.
B)
3%, $100 par value convertible bond.
C)
10%, secured mortgage bond denominated in Swiss francs.


If convertible bonds exist, the firm has a complex capital structure.
作者: mouse123    时间: 2012-3-26 13:25

An analyst has gathered the following information about a company:
What is the company's basic Earnings Per Share?
A)
$2.00.
B)
$3.00.
C)
$1.00.


Interest is already deducted from earnings.
作者: mouse123    时间: 2012-3-26 13:25

The following information pertains to Bender, Inc., for last year:
What is Bender, Inc.’s basic earnings per share (EPS)?
A)
$0.457.
B)
$0.476.
C)
$0.384.


50,000,000 common shares × 12 months = 600,000,000
5,000,000 common shares × 6 months = 30,000,000 = 630,000,000
630,000,000 / 12 = 52,500,000 average shares
[$25,000,000(NI) − $1,000,000(preferred dividends)] / 52,500,000 shares = $24,000,000 / 52,5000,000 = $0.457
作者: mouse123    时间: 2012-3-26 13:26

The standard equation for computing basic earnings per share (EPS) is:
A)
[Net Income − Common Dividends] / Weighted Average Number of Common Shares Outstanding.
B)
[Net Income – Preferred Dividends] / Weighted Average Number of Common Shares Outstanding.
C)
[Sales − Cost of Goods Sold] / Number of Preferred Shares Outstanding.


The basic EPS calculation does not consider the effects of any dilutive securities in the computation.
Basic EPS = [Net Income – Preferred Dividends]/Weighted Average Number of Common Shares Outstanding.
作者: mouse123    时间: 2012-3-26 13:26

Connecticut, Inc.’s stock transactions during the year 20X5 were as follows:

When computing for earnings per share (EPS) computation purposes, what is Connecticut’s weighted average number of shares outstanding during 20X5?

A)
210,000.
B)
140,000.
C)
150,000.


Connecticut’s January 1 balance of common shares outstanding is adjusted retroactively for the 1 for 3 reverse stock split, meaning there are (360,000 / 3) = 120,000 “new” shares treated as if they had been outstanding since January 1. The weighted average of the shares issued in July, (60,000 × 6 / 12) = 30,000 is added to that figure, for a total of 150,000.
作者: mouse123    时间: 2012-3-26 13:27

The following data pertains to the McGuire Company:
What is the company’s basic earnings per share (EPS)?
A)
$2.50.
B)
$1.00.
C)
$1.20.


Number of average shares:

1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000
7/1 1,000 shares repurchased × 6 months = 6,000
66,000 − 6,000 = 60,000
60,000 shares / 12 months = 5,000 average shares

Preferred dividends = ($10)($1,000) = $10,000
Basic EPS = [$15,000(NI) – $10,000(preferred dividends)] / 5,000 shares = $5,000 / 5,000 shares = $1/share
作者: andytrader    时间: 2012-3-26 13:34

For a firm with a simple capital structure, all of the following are necessary to measure basic earnings per share (EPS) EXCEPT:
A)
the timing and number of shares issued or repurchased during the year.
B)
dividends paid to preferred shareholders.
C)
dividends paid to common shareholders.


Basic EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders equals net income minus preferred dividends.
作者: andytrader    时间: 2012-3-26 13:34

Washington, Inc.’s stock transactions during the year 20X4 were as follows:

January 1
   720,000 shares issued and outstanding

May 1
   2 for 1 stock split occurred

What was Washington’s weighted average number of shares outstanding during 20X4, for earnings per share (EPS) computation purposes?
A)
1,500,000.
B)
1,440,000.
C)
1,666,667.


The January 1 balance is adjusted retroactively for the stock split and (720,000 × 2 =) 1,440,000 shares are treated as outstanding from January.
作者: andytrader    时间: 2012-3-26 13:35

A firm has a weighted average number of 20,000 common shares selling at an average of $10 throughout the year and 11,000, 10%, $100 par value preferred shares. If the firm earns $210,000 after taxes, what is its Basic EPS?
A)
$7.50 / share.
B)
$5.00 / share.
C)
$10.50 / share.


(210,000 − 110,000) / 20,000 = $5 share
作者: andytrader    时间: 2012-3-26 13:35

Zichron, Inc., had the following equity accounts on December 31:What are the basic earnings per share reported for the year?
A)
$2.75.
B)
$3.75.
C)
$2.00.


($120,000 − 40,000 − 5,000) / 20,000 shares = $3.75.

What are the diluted earnings per share reported for the year?
A)
$3.00.
B)
$1.50.
C)
$1.33.


($120,000) / (20,000 + 20,000 + 40,000) = $1.50.
作者: andytrader    时间: 2012-3-26 13:35

An analyst gathered the following information about a company:
What is the company’s weighted average number of shares outstanding at the end of 2004?
A)
57,750.
B)
57,500.
C)
55,000.


The weighted average number of common shares outstanding is the number of shares outstanding during the year weighted by the portion of the year they were outstanding. Dividends and splits are applied to all shares issued or repurchased and all original or adjusted shares outstanding prior to the split or dividend.

Step 1) Apply the 04/01/04 dividend to the beginning-of-year shares: Adjusted shares = 1.05 × 50,000 = 52,500

Step 2) Apply the 10/01/04 dividend the adjusted beginning-of-year shares. Adjusted beginning of year shares = 57,750 (= 1.1 × 52,500).

Step 3) Compute the weighted average number of shares. 57,750 × (12/12) = 57,750 shares.
作者: andytrader    时间: 2012-3-26 13:36

Last year, the AKB Company had net income equal to $5 million. Combined state and local taxes were 45%. The firm paid $1 million to holders of its 1 million common shares and $250,000 to 100,000 preferred shareholders. What was AKB's earnings per share (EPS) last year?
A)
$2.25.
B)
$4.75.
C)
$2.50.


EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. Earnings available to common shareholders is net income minus preferred dividends, or $4,750,000 (= $5 million – 250,000) for AKB.
作者: andytrader    时间: 2012-3-26 13:36

At the beginning of 2004, the Alaska Corporation had 2 million shares of common stock outstanding and no preferred stock. At the end of August, 2004, Alaska issued 600,000 new shares of common stock. If Alaska reported net income equal to $8.8 million, what was the firm’s earnings per share for 2004?
A)
$3.38.
B)
$4.00.
C)
$3.67.


EPS = earnings available to common shareholders divided by the weighted average number of common shares outstanding. With no preferred shareholders, all of net income is available to the common shareholders. The weighted average number of shares outstanding equals the original 2 million shares plus 4/12 of the additional 600,000 shares. The 4/12 weight is used because the new shares were only outstanding 4 months of the year. Thus, EPS = $8.8 million / [2 million + (4/12)(600,000)] = 8.8/2.2 = $4.00.
作者: andytrader    时间: 2012-3-26 13:37

Maine Company’s stock transactions during the year are described below:
The weighted average number of shares outstanding used to calculate earnings per share is:
A)
220,000.
B)
211,111.
C)
201,666.


The January 1 balance of common shares outstanding is adjusted retroactively for both stock dividends and stock splits. The weighted average shares outstanding for the year = 100,000 × 2 × 1.1 = 220,000.
作者: andytrader    时间: 2012-3-26 13:37

Suppose that JPK, Inc., paid dividends of $80,000 to its preferred shareholders and $40,000 to its common shareholders during 2004. The company had 20,000 shares of common stock issued and outstanding on January 1, 2004, issued 7,000 more shares on June 1, 2004, and paid a 10% stock dividend on August 1, 2004. Assuming that JPK had $150,000 in net income, what is the firm’s basic earnings per share (EPS) for 2004?
A)
$2.64.
B)
$2.71.
C)
$2.91.


1/1/00 22,000 shares (adjusted for 10% stock dividend) × 12 months = 264,000
6/1/00 7,700 shares (adjusted for 10% stock dividend) × 7 months = 53,900
Total share month = 317,900
Average shares = 317,900 / 12 = 26,492Basic EPS = ($150,000 − $80,000) / 26,492 = 2.64
作者: andytrader    时间: 2012-3-26 13:38

The following data pertains to the Megatron company:
How many common shares should be used in computing the company’s basic earnings per share (EPS)?
A)
5,000.
B)
4,500.
C)
5,500.


1/1 5,500 shares issued (includes 10% stock dividend on 6/1) × 12 = 66,000
7/1 1,000 shares repurchased × 6 months = 6,000
66,000 − 6,000 = 60,000 shares
60,000 shares / 12 months = 5,000 average shares
作者: andytrader    时间: 2012-3-26 13:38

A company has the following sequence of events regarding their stock:
Basic earnings per share at year-end will be computed on how many shares?
A)
1,200,000.
B)
1,000,000.
C)
1,100,000.


作者: andytrader    时间: 2012-3-26 13:38

Moulding Company’s net income was $13,820,000 with 2,600,000 shares outstanding. The average share price for the year was $58.00. Moulding had 10,000 options to purchase 10 shares each at $40 per share outstanding the entire year. Moulding Company’s diluted earnings per share are closest to:
A)
$3.71.
B)
$5.25.
C)
$5.32.


Moulding’s basic EPS (net income / weighted average common shares outstanding) was $13,820,000 / 2,600,000 = $5.32.
Using the treasury stock method to compute diluted EPS, if the options were exercised, cash inflow would be 10,000 × 10 × $40 = $4,000,000. Based on the average share price of $58.00, the number of Moulding shares that can be purchased with the cash flow is $4,000,000 / $58 = 68,966. The number of shares that would have been created is 100,000 – 68,966 = 31,034. Diluted EPS was $13,820,000 / (2,600,000 + 31,034) = $5.25.
作者: andytrader    时间: 2012-3-26 13:39

Valuable Corp.’s basic earnings per share (EPS) and diluted EPS for the year are different. Given this information, which of the following statements is least accurate?
A)
All of Valuable's potentially dilutive securities are antidilutive.
B)
Diluted EPS is less than basic EPS.
C)
Valuable Corp.'s capital structure may include both options and warrants.


If all of Valuable’s potentially dilutive securities were antidilutive, then EPS would equal diluted EPS.
作者: andytrader    时间: 2012-3-26 13:39

An analyst compiled the following information from Hampshire, Inc.’s financial activities in the most recent year:
Hampshire, Inc.’s diluted earnings per share are closest to:
A)
$14.67.
B)
$18.38.
C)
$20.00.


To compute Hampshire’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. 100,000 shares were outstanding from January 1, and 30,000 shares were issued on September 1, so the weighted average is 100,000 + (30,000 × 4 / 12) = 110,000. Basic EPS is ($2,800,000 – (10,000 × $1,000 × 0.06)) / 110,000 = $20.00.
If the warrants were exercised, cash inflow would be 10,000 × $150 × 10 = $15,000,000 for 10 × 10,000 = 100,000 shares. Using the treasury stock method, the number of Hampshire shares that can be purchased with the cash inflow (cash inflow / average share price) is $15,000,000 / $250 = 60,000. The number of shares that would be created is 100,000 – 60,000 = 40,000. Diluted EPS is $2,200,000 / (110,000 + 40,000) = $14.67.
作者: andytrader    时间: 2012-3-26 13:39

Selected information from Feder Corp.’s financial activities for the year is as follows:
Feder Corp.’s diluted earnings per share (EPS) was closest to:
A)
$5.87.
B)
$4.91.
C)
$5.32.


Feder’s basic earnings per share ((net income – preferred dividends) / weighted average shares outstanding) was (($7,650,000 – ($1,000 × 10,000 × 0.06)) / 1,100,000 =) $6.41.
If the convertible preferred stock was converted to common stock at January 1, (10,000 × 20 =) 200,000 additional common shares would have been issued, dividends on the preferred stock would not have been paid, and Diluted EPS would have been ($7,650,000 / (1,100,000 + 200,000) = $5.88. Because $5.88 is less than basic EPS of $6.41, the preferred shares are dilutive.
Using the treasury stock method, if the options were exercised cash inflow would be (70,000 × 10 × $50 =) $35,000,000. The number of Feder shares that can be purchased with the inflow (cash inflow divided by the average share price) is ($35,000,000 / $62 =) 564,516.
The number of shares that would have been created is (700,000 – 564,516 =) 135,484. Diluted EPS was ($7,650,000 / (1,100,000 + 135,484) =) $6.19. Because this is less than the EPS of $6.41, the options are dilutive.
Combining the calculations, Diluted EPS was (($7,650,000) / (1,100,000 + 200,000 + 135,484) = $5.32.
作者: andytrader    时间: 2012-3-26 13:40

In applying the treasury stock method, if warrants allow the purchase of 1 million shares at $42 per share when the average price is $56 per share, how many shares will be added to the firm’s weighted average number of shares outstanding?
A)
1,000,000.
B)
250,000.
C)
420,000.


The treasury stock method would allow the 1 million additional shares to be partially offset by the number of shares that could be repurchased with the amount of money received for those shares. In this case, the 1 million shares issued would be offset by (1,000,000 × $42 / $56) or 750,000 shares.
作者: andytrader    时间: 2012-3-26 13:41

Cassie Hamilton is an analyst with Pacers Worldwide, an investment banking firm. She just received the following information (as of year-end) for Trotters Diversified:In the denominator of the basic EPS calculation, Hamilton should include how many shares related to the convertible bonds?
A)
80,000.
B)
0.
C)
10,000.


The calculation for basic EPS excludes the impact of complex capital elements.
Hamilton correctly calculates diluted EPS at approximately:
A)
$1.23.
B)
$1.50.
C)
$1.19.


As we will show below, only the options and convertible preferred stock are dilutive.First, calculate basic EPS to use as a benchmark to determine dilutive capital components.
Basic EPS = (net income – preferred dividends) / weighted average common shares outstanding
Here, preferred dividends = (0.5 shares × $30 par × 0.10 dividend) = $1.5 million = (9.0 – 1.5) / 5.0 = $1.50.
Now, check for dilutive elements.
Finally, calculate dilutive EPS:
Diluted EPS = (9.0 – 1.5 + 1.5) / (5.0 + 2.5 + 0.034) = approximately $1.19
作者: andytrader    时间: 2012-3-26 13:41

All of the following are considered a potentially dilutive securities EXCEPT:
A)
stock options.
B)
preferred stock.
C)
warrants.


Not all preferred stock is dilutive. Only convertible preferred stock is potentially dilutive.
作者: andytrader    时间: 2012-3-26 13:41

Examples of potentially dilutive securities include all of the following EXCEPT:
A)
non-convertible bonds.
B)
convertible preferred stock.
C)
options.


Preferred stock and bonds are only considered to be potentially dilutive if they are convertible. Options are always considered to be potentially dilutive.
作者: andytrader    时间: 2012-3-26 13:42

When calculating earnings per share (EPS) for firms with complex capital structures, stock options are ordinarily considered to be:
A)
antidilutive securities.
B)
potentially dilutive securities.
C)
derivative securities.


Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. When the exercise price is less than the average market price, stock options are considered to be dilutive, Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities.
作者: andytrader    时间: 2012-3-26 13:42

When calculating earnings per share (EPS) for firms with complex capital structures, convertible bonds are ordinarily considered to be:
A)
embedded debt securities.
B)
potentially dilutive securities.
C)
antidilutive securities.


Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities. Note that if diluted EPS when considering the convertible bonds is greater than basic EPS, the convertible bonds would be antidilutive and should not be treated as common stock in computing diluted EPS.
作者: andytrader    时间: 2012-3-26 13:42

When calculating earnings per share (EPS) for firms with complex capital structures, convertible preferred stock is ordinarily considered to be a:
A)
non-equity security.
B)
potentially dilutive security.
C)
antidilutive security.


Dilutive securities are securities that decrease EPS if they are exercised or converted to common stock. Stock options, warrants, convertible debt, and convertible preferred stock are examples of potentially dilutive securities. Note that if diluted EPS when considering the convertible preferred stock is greater than basic EPS, the convertible preferred stock would be antidilutive and should not be treated as common stock in computing diluted EPS.
作者: andytrader    时间: 2012-3-26 13:43

Which of the following statements regarding the treasury stock method of computing diluted shares is least accurate? The treasury stock method:
A)
is used when the exercise price of the option is less than the average market price.
B)
increases the total number of shares by less than the number that the exercise of the options would create.
C)
assumes that the hypothetical funds received by the company from the exercise of the options are used to sell shares of the company’s common stock in the market at the average market price.


The treasury stock method assumes any funds received by the company from the exercise of the options are used to purchase shares (not sell shares) of the company’s common stock in the market at the average market price.
作者: andytrader    时间: 2012-3-26 13:43

Which of the following statements is CORRECT regarding the reporting of earnings per share (EPS)?
A)
The EPS when antidilutive securities are converted into shares of common stock is less than basic EPS.
B)
Basic EPS can be less than diluted EPS.
C)
Diluted EPS must be less than or equal to basic EPS.


Antidilutive securities are securities that would increase EPS if exercised or converted to common stock.
作者: andytrader    时间: 2012-3-26 13:43

Based on the following data, how many shares of common stock should be used to calculate diluted earnings per share?
A)
1,100,000.
B)
1,266,667.
C)
1,000,000.


First, Check for dilution: Basic EPS = 1,500,000 / 1,000,000 = 1.50
Warrants: anti-dilutive since the average stock price is less than the exercise price
Convertible bonds: numerator impact = (# bonds) × (par value) × (interest rate) × (tax retention rate) × (0.5 for 1/2 year outstanding) = (10,000) × (100) × (0.06) × (0.6) × (0.5) = 18,000, so the numerator = 1,518,000 Denominator impact: increase in average shares = [(# bonds) × (conversion factor) × (# months outstanding)] / 12 = (1,200,000 / 12 = 100,000) so, the denominator = 1,100,000 and EPS with conversion = 1,518,000 / 1,100,000 = 1.38, which is less than 1.50. The bonds are dilutive and the diluted EPS calculation should use 1,100,000 shares of common stock in the denominator. The warrants are out of the money based on the average price of $20.
作者: andytrader    时间: 2012-3-26 13:44

Selected information from Doors, Inc.’s financial activities in the year 2005 included the following:
Doors, Inc.’s diluted earnings per share (Diluted EPS) for 2005 was closest to:
A)
$2.96.
B)
$3.72.
C)
$3.28.


Doors basic earnings per share (EPS) was ($372,000 / 100,000 =) $3.72. If the bonds were converted, interest payments would not have been made. Net income is increased by the interest paid on the bonds net of taxes: $372,000 + (($1000 × 2,000 × 0.06) × (1 − 0.40)) = $444,000.
Diluted EPS was $444,000 / (100,000 + (2,000 × 25)) = $2.96.



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