Chapter 11 - earnings per share and distributable profits

Question 1

Per Earnings Ratio

Answer 1

Market value of share / EPS

Question 2

Earnings per share is only mandatory for:

Answer 2

• The separate financial statements of entities whose ordinary shares are publicly traded or in the process of being issued in public markets
• The consolidated financial statements for groups whose parent has shares similarly traded/being issued

Question 3

Basic EPS:

Answer 3

earnings/shares

Question 4

Redeemable preference shares

Answer 4

Redeemable preference shares are treated as a liability. The related dividends are therefore treated as a finance cost in the statement of profit or loss, so have already been deducted in arriving at a profit for the year.

Question 5

Irredeemable preference shares

Answer 5

Irredeemable preference shares are treated as equity unless they have cumulative or mandatory dividends. Their dividends are deducted from retained earnings in the SOCE. As these dividends must be paid before any ordinary dividends can be paid, they are deducted from net profit to arrive at the earnings figure available to ordinary shareholders.

Question 6

Cumulative preference shares

Answer 6

Always assume that preference share dividends have been paid in the correct period (i.e. in the year to which they relate).

Question 7

bonus fraction for rights issue

Answer 7

market price before the issue / TERP

Question 8

Undistributable reserves are:

Answer 8

• share premium account
• excess unrealised profits over unrealised losses
• any other reserve which the company is prohibited from distributing any statute or by its memorandum or articles of association