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Accounting > Dilutive Securities and EPS > Flashcards

Dilutive Securities and EPS Flashcards

Acct 202 ch 15

1
Q

Stock Warrants are…

A

Securities that give investors the option to purchase a company’s stock @ a specific price over a specific period

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2
Q

Warrants are typically included as a ________ to investors to purchase a bond issuance

A

Sweetener

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3
Q

Advantages of stock warrants

A
  1. Allows investors to share in the future growth of the company
  2. Can be sold in the market
  3. Lower interest rate
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4
Q

Upon exercise of the stock warrant, there is an exchange of…

A

Cash

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5
Q

When stock warrants are issued with bonds, the stock warrants can be…

A

Detachable or Nondetachable

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6
Q

If a stock warrant is detachable…

A

They can be sold separately from the bonds

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7
Q

If a stock warrant is nondetachable…

A

They can only be sold with the bond

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8
Q

Debt + Nondetachable Stock Warrants = ?

A

Synthetic Convertible Debt, as they share similar attributes w/ convertible bonds

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9
Q

Do nondetachable warrants require an allocation of the proceeds between the bonds and warrants?

A

No

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10
Q

The company should allocate the proceeds from the sale of debt w/ detachable stock warrants between…

A

the 2 securities (debt + detachable stock warrant)

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11
Q

The ability to trade detachable warrants separately from the debt allows companies to…

A

Better determine the fair value of the equity and debt components for the convertible security

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12
Q

The 2 methods to determine how much to allocate to each security are…

A
  1. Proportional
  2. Incremental
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13
Q

The ________ method is the preferred allocation method companies use

A

Proportional

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14
Q

The ______ method allocates the proceeds using the proportion of the 2 amounts based on their fair values

A

Proportional

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15
Q

The J/E to sell stock warrants

A

Dr Cash
Cr Paid in Capital - Stock Warrants

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16
Q

The J/Es to record the sale of the bonds and warrants can he shown seperately to…

A

Emphasize that the purchaser is buying a bond + a potential future claim on common stock in the form of a stock warrant

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17
Q

J/E to exercise all warrants (convert to C/S)

A

Dr Cash
Dr Paid in Capital - Stock Warrants
Cr Common Stock
Cr Paid in Capital in Excess - Common Stock

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18
Q

J/E on the date the warrant expires

A

Dr Paid in Capital - Stock Warrants
Cr Paid in Capital - Expired Stock warrants

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19
Q

Stock-based compensation plans are…

A

long term compensation plans meant to develop company loyalty by giving them equity interest, or a piece of the pie

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20
Q

Stock options are a form of stock-based compensation that allows…

A

Employees the option to purchase common stock @ a given price over an extended period of time

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21
Q

There is a _______________ over which the employee must work before they can use their stock options

A

Service, or vesting period

22
Q

The date that the company grants a stock option to an employee is called the…

A

Grant date

23
Q

The option exercise price is often…

A

equal to or slightly higher than the market price of the stock on the grant date

24
Q

The compensation expense amount is usually determined on the…

A

Grant date

25
Q

GAAP requires companies to recognize compensation cost using…

A

The fair value method, which determines the amount based on a measure of value of the services received

26
Q

The 2 main accounting issues for stock options

A
  1. Determining compensation expense
  2. Allocating compensation expense over an appropriate period
27
Q

A company recognizes compensation expense during…

A

The employee’s service period

28
Q

J/E for the grant date of the stock option

A

N/A

29
Q

J/E for an employee’s service period

A

Dr Compensation Expense
Cr Paid in Capital - Stock Options

30
Q

J/E for an employee’s compensation expense

A

Dr Compensation Expense
Cr Paid in Capital - Stock Options

31
Q

Compensation expense is allocated ____ over the service period

A

evenly

32
Q

Once the service period is complete, the employee can _______ the options

A

Exercise, or use

33
Q

J/E to exercise stock options

A

Dr Cash
Dr Paid in Capital - Stock Options
Cr Common Stock
Cr Paid in Capital in Excess - Common Stock

34
Q

J/E on the date the stock option expires

A

Dr Paid in Capital - Stock options
Cr Expired Stock options

35
Q

Is there an adjustment made if the compensation expense is when the options expire?

A

No, b/c the expense was still incurred during the service period

36
Q

When an employee forefits their stock options, the company has to adjust…

A

the estimated compensation expense recorded in the current period

37
Q

J/E to adjust compensation expense due to forefiture

A

Dr Paid in Capital - Stock options
Cr Compensation Expense

38
Q

Dilutive securities

A

Securities that can be converted to common stock

39
Q

Dilutive securities reduce, or dilute EPS upon…

A

Conversion, or exercise by the holder

40
Q

The effect of dilution on EPS can be ________ unless financial statements call out their potential dilutive effect

A

Unexpected

41
Q

When a company has a complex capital structure, it generally reports…

A

both basic and diluted EPS

42
Q

Diluted EPS = ?

A

Basic EPS - impact of convertibles - impact of other dilutive securities like options and warrants

43
Q

Antidilutive securities

A

Securities that increase EPS upon conversion (Reduces loss per share)

44
Q

If a company has antidilutive securities in their complex capital structure…

A

They won’t report diluted EPS

45
Q

The purpose of presenting both basic and diluted EPS is to…

A

Inform people of situations that will likely occur (basic EPS), along with worst case scenarios (diluted EPS)

46
Q

If the securities are antidilutive, the chances of conversion or exercise is…

A

Little to none

47
Q

Companies measure the dilutive effects of potential conversion on EPS using the…

A

If-converted method

48
Q

The If-converted method assumes…

A
  1. The bond was converted @ the beginning of the period, or at time of issuance
  2. No interest was paid, net of tax; it’ll get added back to net income
49
Q

How to find adjusted net income for the numerator of diluted EPS

A

Net Income for the year + Adjustments for interest net of tax

[Debenture % * principal of bond] * Time if applicable *[1 - Tax rate]

50
Q

How to find adjusted weighted average number of shares for the denominator of diluted EPS

A

Weighted-average number of shares o/s + shares assumed to be issued

51
Q

Basic EPS = ?

A

(Net Income - P/S Dividends) / Weighted C/S Outstanding

Accounting (5 decks)

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