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Reading 32: Understanding the Income Statement - LOS i ~ Q

Q9. When calculating earnings per share (EPS) for firms with complex capital structures, stock options are ordinarily

considered to be:

A)      antidilutive securities.

B)     derivative securities.

C)     potentially dilutive securities.

Q10. When calculating earnings per share (EPS) for firms with complex capital structures, convertible bonds are

     ordinarily considered to be:

A)     embedded debt securities.

B)     antidilutive securities.

C)     potentially dilutive securities.

Q11. When calculating earnings per share (EPS) for firms with complex capital structures, convertible preferred stock

     is ordinarily considered to be a:

A)     potentially dilutive security.

B)     non-equity security.

C)     antidilutive security.

Q12. Which of the following statements regarding the treasury stock method of computing diluted shares is least accurate? The

     treasury stock method:

A)     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.

B)     is used when the exercise price of the option is less than the average market price.

C)     increases the total number of shares by less than the number that the exercise of the options would create.

Q13. Which of the following statements is TRUE regarding the reporting of earnings per share (EPS)?

A)     Diluted EPS must be less than or equal to basic EPS.

B)     The EPS when antidilutive securities are converted into shares of common stock is less than basic EPS.

C)     Basic EPS can be less than diluted EPS.

答案和详解如下:

Q9. When calculating earnings per share (EPS) for firms with complex capital structures, stock options are ordinarily

considered to be:

A)      antidilutive securities.

B)     derivative securities.

C)     potentially dilutive securities.

Correct answer is C)

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.

Q10. When calculating earnings per share (EPS) for firms with complex capital structures, convertible bonds are

     ordinarily considered to be:

A)     embedded debt securities.

B)     antidilutive securities.

C)     potentially dilutive securities.

Correct answer is C)

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.

Q11. When calculating earnings per share (EPS) for firms with complex capital structures, convertible preferred stock

     is ordinarily considered to be a:

A)     potentially dilutive security.

B)     non-equity security.

C)     antidilutive security.

Correct answer is A)

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.

Q12. Which of the following statements regarding the treasury stock method of computing diluted shares is least accurate? The

     treasury stock method:

A)     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.

B)     is used when the exercise price of the option is less than the average market price.

C)     increases the total number of shares by less than the number that the exercise of the options would create.

Correct answer is A)

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.

Q13. Which of the following statements is TRUE regarding the reporting of earnings per share (EPS)?

A)     Diluted EPS must be less than or equal to basic EPS.

B)     The EPS when antidilutive securities are converted into shares of common stock is less than basic EPS.

C)     Basic EPS can be less than diluted EPS.

Correct answer is A)

Antidilutive securities are securities that would increase EPS if exercised or converted to common stock.

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