Chapter 15 - Earnings per share and distributable profits

Question 1

Why is EPS an important indicator of company performance?

Answer 1

Can compare to diff entities

Can compare to diff accounting periods

Question 2

What is the PE ratio

Answer 2

Market value of shares / EPS

Question 3

How does EPS ensure comparability?

Answer 3

same disclosures and presentations

defines earnings

explains methods to determine number of shares for calculation

Question 4

Formula for EPS?

Answer 4

Earnings / Share

Question 5

How to deal with Redeemable preference shares?

Answer 5

debt/finance costs already inc

Question 6

How to deal with Irredeemable preference shares?

Answer 6

equity/ deduct from profit or loss

Question 7

How to deal with Cumulative preference shares?

Answer 7

pretend already paid

Question 8

How to deal with bonus issue share?

Answer 8

1 for 5 = 6/5

restate prior year by denominator x bonus fraction

Question 9

How to deal with rights issue share?

Answer 9

1. TERP

2. Bonus fraction (market price/TERP)

Question 10

Companies can only pay dividends from profits available for that purpose.

TRUE/FALSE

Answer 10

TRUE

Question 11

What are distributable profits?

Answer 11

Accuumulated, realised profits less accumulated losses

Accumulated = balance of P/L from last year + current period profit

Realised = when in cash/probable to become cash

(normally, retained earning)

Question 12

Distributable profit is based on:

• individual accounts

OR

• company accounts

Answer 12

individual accounts

Question 13

What are the rules for distributable profits?

Answer 13

Provision = realised loss

Reval surplus = unrealised profit

Revaluation causes increase in depreciation = realised profit

Disposal = any unrealized surplus/loss becomes realized

Question 14

Undistributable profits are:

Answer 14

Share premium

excess unrealised profits over unrealised loss

any other reserve that is prohibited