Basic Earnings per Share

Question 1

How is basic earnings per share calculated if common stock and nonconvertible preferred stock are outstanding?

Answer 1

(Net income – Preferred dividends) / (Weighted average common shares outstanding)

Question 2

When are contingent shares considered outstanding?

Answer 2

When their conditions have been met

Question 3

Define “contingent shares.”

Answer 3

Shares issuable for little or no cash consideration upon satisfaction of certain conditions

Question 4

What is the accounting effect of a stock split dividend between balance sheet date and issuance?

Answer 4

Adjustment of all earnings per share (EPS) amounts for stock split or dividend

Question 5

What is the general rule for stock splits and dividends in the weighted average share calculation?

Answer 5

Treat as outstanding from inception of firm (“AS IF”)

Question 6

The number of shares issued as of January 1 was 6,000, which included 1,000 in the treasury. The firm declared and distributed a 40% stock dividend on December 29. The weighted average shares outstanding for the year is 7,000. True or False

Answer 6

True

Question 7

The current year began with 1,000 shares of common stock issued and outstanding. On April 30, the firm purchased 100 shares for the treasury. On October 1, the firm issued a 30% stock dividend. On November 1, the firm issued 300 unissued shares. Weighted average shares for the purpose of computing EPS is 1,263. True or False

Answer 7

True

Question 8

The weighted average shares outstanding for BEPS includes 1,000 shares if 12,000 shares were issued on December 1 for a calendar-fiscal year firm.

Answer 8

True

Question 9

The weighted average shares outstanding for BEPS includes 1,000 shares if 12,000 shares were issued on December 31 for a calendar-fiscal year firm. True or False

Answer 9

False

Question 10

How is the weighted average number of shares outstanding calculated?

Answer 10

of shares at the beginning of the year + (shares issued / 12 months * # of remaining months in the year)
example:
10,000 (shares outstanding) + 3,000 (4,000 issued on march 30, /12 * 9)= 13,000

Question 11

If a company has the following related to common and preferred shares during the year, what is used as the denominator in computation of BEP?

Common shares outstanding, 1/1 700,000
Common shares repurchased, 3/31 20,000
Conversion of preferred shares, 6/30 40,000
Common shares repurchased, 12/1 36,000

Answer 11

Shares	Months	Wtd avg
700,000	12/12	700,000
- 20,000	9/12	       - 15,000
\+40,000	6/12	       +20,000
-36,000	1/12   	- 3,000

702,000

Question 12

How do you calculate weighted average of common shares outstanding when a company purchases part of it’s common stock as treasury stock?

Answer 12

Subtract the the amount of common stock purchased as treasury stock from the weighted average calculation.

Example:
100,000 common stock
4/1 Issued 30,000 shares of common stock.
6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost method to account for the treasury stock.

139,008 = 100,000(12/12) + 30,000(9/12) + 36,000(7/12) - 35,000(4/12).