F1 - M2 - EPS and Public Company Reporting Topics

Question 1

What is EDGAR?

Answer 1

This is where the SEC holds all the information filed by a public company, including their financial statements.

Question 2

What is the form 10-K?

Answer 2

This is the annual report that must be filed by U.S. registered companies.

Provides current and prospective investors about;

business of the company and relevant risk factors

financial and operating results for the year

the perspective of its executive leadership

Question 3

What is the filing deadline for 10k’s?

Answer 3

60 days after year end for large accelerated filers (market value is greater than 700 million)

75 days after year end for accelerated filers (75 to 700 million in market value and 100 million in revenue)

90 days for everyone else (100 million revenue or less)

Question 4

One of the items in the 10-K is Management’s Discussion and Analysis of Financial Condition”, what is that? (MD&A)

Answer 4

This is where management puts into their own words the business results of the company.

You get an explanation through the eyes of management, and known trends and uncertainties.

Question 5

What are some of the components MD&A will include?

Answer 5

Material information relevant to the companies financial position - such as liquidity and capital resources. The lifeblood of the company.

Summarized financial and operating results, trends, risks, and uncertainties.

Material changes and uncertainties relative to the prior period.

Critical accounting estimates and assumptions.

Question 6

Another item in the 10-K is Quantitative and Qualitative Disclosures about Market Risk? What is that and what are some examples?

Answer 6

Market risk includes the risk of potential loss in value of financial instruments. Some examples include:

Interest rates - The interest rates go higher, which brings you more interest income.

Exchange rates - You do business in a foreign currency, and the exchange rate goes up or down which could lose or gain you more money.

Inflation, Recession, Supply chain distribution, and War/sanctions.

Question 7

Another item in the 10-K is Quantitative and Qualitative Disclosures about Market Risk? How can these items be disclosed in the 10k?

Answer 7

Tabular presentation related to market risk and sensitivity

Sensitivity analysis - If we changed by 1% more or less, how would this impact us?

Value at risk disclosures - potential loses in earnings, fair value, cash flows, instruments.

Question 8

Another item in the 10-K is Quantitative and Qualitative Disclosures about Market Risk? How is the qualitative information disclosed?

Answer 8

Primary market risk exposure - How exposed are you to these risks?

Management of these risks - How will you manage the risks?

Changes to the most recent fiscal year, and expectations for future periods - What does management think about the future with these risks?

Question 9

The time period covered in the 10-k include which of the following?

Answer 9

Balance sheets for the two most recent fiscal years

Income statements for the most three recent fiscal years

Statement of cash flows for the three most recent fiscal years

Changes in owners equity in the three most recent fiscal years

Question 10

Is the auditor report and the certification from the companies CEO included in the 10-K?

Answer 10

Yes

Question 11

What is a 10-Q and what are the filing deadlines?

Answer 11

Same as 10-k just quarterly, file for the first three quarters in the fiscal year.

40 days for large accelerated and accelerated filers

45 days for everyone else

Question 12

Are the 10-Q financial statements normally audited?

Answer 12

No

Question 13

What is an 8-K, and what are some examples?

Answer 13

This is when a major event occurs, and you want to notify the shareholders and investors. They include

Bankruptcy, acquired or disposed major assets, change in accounting firm, changes in securities and accounting markets, changes in election of directors and officers, changes in articles of incorporation, changes in fiscal year, financial statement changes, material definitive agreements.

Normally have four business days to file this after a change occurred.

Question 14

Is it true that all public entities are required to present earnings per share on the face of the income statement?

Answer 14

Yes

Question 15

What is a simple capital structure? What does it mean for EPS?

Answer 15

An entity with a simple capital structure means they only have common stock outstanding.

No convertible bonds, convertible preferred equity, outstanding options, outstanding warrants.

The entity presents basic per share amounts on the income statement.

Question 16

For entities that are not a simple capital structure, what type of EPS must they present?

Answer 16

Both basic and diluted eps amounts

Question 17

If the entity reports discontinued operations, they must present the basic and diluted eps amounts where on the income statement?

Answer 17

Either the face of the income statement or the notes. This is the only exception.

Question 18

For basic EPS, what are the two accounts you must calculate EPS for? What is the calc?

Answer 18

You have to calculate EPS for income from continuing operations and for net income on the face of the income statement. Both of these are the numerator.

The denominator is the number of common shares outstanding.

Question 19

For an organization with a simple capital structure, what is the formula for earnings per share?

Answer 19

Income available to common shareholders (Net income - preferred dividends)/ Weighted average number of common shares outstanding (WACSO)

Question 20

How do you calculate preferred dividends if the dividend is cumulative and noncumulative?

Answer 20

Cumulative preferred shares - These are shares that accumulate when unpaid. Basically, if a company skips paying a divided in a certain year, the cumulative shareholders can get payment for those years that the shares were unpaid. Noncumulative, don’t have any claim to any unpaid dividends. Formula below:

Cumulative = Number of preferred shares * Par value per share * rate

Noncumulative = Any amount declared

Question 21

What is the formula for WACSO?

Answer 21

Shares outstanding at the beginning of the period
+ Shares sold during the period (on a time weighted basis)
- Shares reacquired during the period (on a time weighted basis)
+ Stock dividends and stock splits (retroactively adjusted)
- Reverse stock splits (retroactively adjusted)
= WACSO

Question 22

If a stock dividend or a stock split occurred after year end but before the financial statements were issued, should those shares be entered into the shares outstanding for the EPS calc?

Answer 22

Yes

Question 23

Can you explain how the stock split calculation works?

Answer 23

For example, lets say you start the year with 1,000,000 shares outstanding and in March 1st, you have a 2-1 stock split. That basically means, instead of having 1,000,000 shares outstanding, you have 2 million. You treat the stock split retroactively, so you start the year with 2,000,000 outstanding like the stock split happened at the start of the year, even though it happened in March.

Same applies for stock dividends.

Question 24

What is the purpose of diluted EPS?

Answer 24

Things that can be converted to common stock, and makes basic EPS go down.

Question 25

What is the formula for Diluted EPS?

Answer 25

Income available to the common stock shareholder + Interest on dilutive securities/ WACSO

Question 26

How do you know if options and warrants are dilutive?

Answer 26

They are only dilutive if the average price > Strike (exercise) price

Question 27

What dilution method is used for convertible securities and bonds?

What is the formula?

Answer 27

The “if - converted” method, assumes that the securities were converted to common stock at the beginning of the period.

In the numerator, you need to add the interest expense net of tax for the assumed conversion of bonds to common stock. (interest expense * (1-tax))

In the denominator, you need to add the common shares associated with the assumed conversion. # of bonds * # of common stock per bond.

Note: This is added to the basic EPS formula. Only report dilution if it makes EPS go down.

Question 28

Regarding the dilution for convertible securities, we covered what occurs for common stock. What happens if there is preferred stock involved?

Answer 28

You would adjust the numerator with the number of preferred dividends, since that does not impact net income. Now, if the preferred shares get converted to common shares, when you calculate diluted EPS, there would be no amounts to add in the numerator. Why, because they went from preferred div to common, and the basic EPS formula for the numerator is NI-Preferred div.

Add to the denominator the number of shares associated with the assumed conversion. This would be the number of shares that went from preferred stock to common stock.

Question 29

If a contract can be settled in either cash or stock, is this dilutive? How does this work?

Answer 29

If a contract can be either settled for cash or stock, we presume that it will be paid in stock. The stock payment will increase the number of shareholders that we have, which in turn will dilute our EPS.

Question 30

What is dilution from contingent shares?

Answer 30

This is where someone gets paid via stock only if certain targets are met. Like certain revenue goals are hit, or employee works a certain number of years.

Now, if the targets were met before the end of the calendar year, then we will include these shares in the basic EPS formula as if the requirements were met at the beginning of the year.

Question 31

What must be disclosed in the financials for EPS?

Answer 31

Cash flows per share should not be reported, but you should report on the face of the income statement, EPS and diluted EPS from continuing operations and net income on the face of the financial statements.

Question 32

If the dilution is possible in the fiscal year, but has not occurred, do you still have to report it? For example, someone could covert preferred shares to common, they just didn’t in the fiscal year?

Answer 32

Yes, even if it is an option, you still have to report the dilution.

Question 33

For the income statement, what are some accounts that need to be allocated among the different quarters, and what items are recognized when incurred?

Answer 33

Allocated: property taxes, repairs, more when I come across them.

Not allocated: Gains and losses,