FAR 29

Question 1

The “if converted” method of computing earning per share assumes conversion of convertibles when

Answer 1

It assumes that they are converted at the beginning of the earliest period reported

or if later - at the time if issuance

Question 2

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

What amount of shares should Coffee use as the denominator in the computation of basic earnings per share?

Answer 2

1/1 700,000 outstanding 1/1 - 12/31 (700,000 x 12/12) = 700,000

3/31 20,000 shares repurchased 3/31 - 12/31 (20,000 x 9/12) = (15,000)

6/30 40,000 converted from preferred 6/30-12/31 (40,000 x 6/12) = 20,000

12/1 36,000 repurchased 12/1 - 12/31 (36,000 x 1/12) = (3,000)

Weighted Average
702,000

Question 3

How do you calculate diluted EPS

Answer 3

1) Calculate Basic EPS:

15,000 x 3/12 =3,750

12,500 x 2/12 =2,083

17,000 x 7/12 =9,917

Weighted Avg C/S = 15,750
Net Income = 125,000

125,000 / 15,750 = 7.94 EPS

Then look at anything else that could be converted like stock options, or convertible bonds -

Determine if each one is dilutive - meaning they would lower EPS:

Stock Options:

• Assume options were exercised and Co. bought back as many shares as possible based on exercise price

Example: 100 shares $10 exercise price with a market value of $20 per share

= 100 *$10 = $1000 proceeds

$1,000/$20 = 50 share you can buy back and add to denominator

15750 + 50 = 15,800

For Convertible Bonds:
Assume the bonds are converted to shares and add the shares to the denominator:

10 convertible bonds each convertible to 50 shares:
10 * 50 = 500 shares

Add 500 to denominator:
15,800 + 500 = 16,300

Question 4

What do you do if market value of the shares ($10) is less than the exercise price ($15)

Answer 4

Its anti dilutive and you would not use the number

Question 5

What is the effect of preferred stock on calculating diluted EPS

Answer 5

Preferred stock that is not convertible is NOT potentially dilutive and therefore would NOT be included in calculating diluted EPS

Question 6

How much preferred stock dividend would be saved per share: 6% $100 par cumulative convertible preferred stock issued at par with each one converted into 4 shares of C/S

Answer 6

100*.06 = $6 saved per share

for dilutive calculations - if you save $6/4shares = $1.50 per share

compare this amount to EPS to see if it is dilutive or not

Question 7

What is the difference between GAAP and IFRS with regards to diluted EPS

Answer 7

Options that are not vested (exercisable) are STILL treated as exercised for purpose of diluted EPS

This is just like GAAP

Question 8

when do you include dividends on preferred shares in the calculation of EPS

Answer 8

If non cumulative preferred are DECLARED - include

If cumulative preferred stock dividends - INCLUDE for current year ONLY ( no prior years)

Question 9

What is the effect if there is a net loss and you have cumulative preferred dividends and declared noncumulative dividends

Answer 9

noncumulative preferred dividends - increase loss

declared dividends - increase the loss

Question 10

What happens if you have a stock split after the end f the year but before ether issuance of the F/S

Answer 10

you count it as if it happened at the beginning of the year that is being reported on

Question 11

Who is required to report EPS?

Answer 11

Public co.

Basic Earning per Share

If you have diluted EPS then you must report these as well

EPS is reported for income from Continuing operations, discontinued operations and net income

Question 12

What is the effect of the failure to accrue sales salaries on working capital and cash flows from operations

Answer 12

• working capital would be overstated - (you would not include the expense)
• There would be NO Effect on cashflows - whether an item has been accrued has no affect on when it will be paid - hence - no effect on cashflows

Question 13

times interest earned

Answer 13

Income before interest and tax / interest

It is used to measure the ratio of the entity’s income that is available to pay interest to the actual amount of interest incurred

Question 14

What is the dividend per share payout ratio

Answer 14

dividends per share / earnings per share

Question 15

At December 30, 20X3, Vida Co. had cash of $200,000, a current ratio of 1.5:1 and a quick ratio of 0.5:1. On December 31, 20X3, all cash was used to reduce accounts payable. How did these cash payments affect the ratios

Answer 15

Increase current ratio and decrease quick ratio

cash payment of A/P - decreases A/R and A/P by same amount

so with the quick ratio - would decrease .5/1 = .5 .4/.9 = .44 .5 >.44 so a decrease

with current ratio there would be an increase:

1. 5: 1 = 1.5 / 1 = 1.5
2. 4/.9 = 1.55
3. 55 > 1.5 therefore current ratio would increase

Question 16

what are the factors that cause inventory turnover to increase

Answer 16

cogs/ avg inventory

to increase : COGS would have to increase or avg. inventory would have to decrease

a decrease in COGS = decrease in inventory turnover

A decrease in gross profit percentage = means that COGS increased as compared to sales - so that means you are making less money
COG increased so this would increase inventory turnover

Question 17

What are included in quick assets

Answer 17

• Cash
• A/R - net
• short term marketable securities

Question 18

How do you calculate net credit sales

Answer 18

Avg receivable * receivable turnover

AR at beginning 20K
A/R at ending 22K
A/R turnover - 5.0

20 + 22 / 2 = 21,000 * 5.0 = 105,000

Question 19

What does an increase in asset turnover ratio mean

Answer 19

Sales / total assets

an increase in the ratio: increase in sales or a decrease in total assets

Question 20

What is income as a percentage of sales

Answer 20

Income/ sales

An increase in this would either come from increase in income or a decrease in sales

Question 21

ROI

Answer 21

income / assets

Question 22

What will increase ROI

Answer 22

increase in Asset turnover and an increase in income as a percentage of sales

Question 23

what is the method called segments are part of an entity

Answer 23

Management approach

Question 24

What is the defensive interval ratio

Answer 24

this measures the length of time a co. van continue to pay its bills using:

only liquid current assets

Question 25

how do you calculate PE ratio

Answer 25

It is the price of the stock in the market ($12) divided by EPS

This is calculated as net income / C/S outstanding
$240,000/ 300,000 share = .80

12/.8 = 15

so PE ratio = 15:1

Question 26

How do you calculate operating cycle

Answer 26

days sales of inventory + days sales in trade A/R

61 + 33 = 94

Question 27

What is the effect If you issue a stock dividend on Current Ratio, Inventory Turnover, and Total Debt/ Total Assets Ratio

Answer 27

Current ratio - No effect
Inventory Turnover - No effect
Total Debt to Total equity - No effect

JE
dr. R E
cr. C/S (par)
cr APIC

Question 28

What is the effect If you declare but do not pay a cash dividend on Current Ratio, Inventory Turnover, and Total Debt/ Total Assets Ratio

Answer 28

JE:
Dr. R.E.
cr. dividends payable (current Liability)
Current ratio: decrease (current assets are the same but dividends payable is a liability which increases Current Liability

Inventory Turnover: No effect
no effect on COGS or Inventory

Ttl Debt / Total Equity” It increases total debt, which total equity remains the same so Increases the ratio

Question 29

What is the effect if you pay A/P with cash - Current ratio, Inventory turnover, total debt to total asset

Answer 29

JE:

dr. A/P
cr. CASH

Current ratio: your cash goes down and you A/P go down in the same amount

If the current ratio is greater than 1:1 this will result in an INCREASE in current ratio - If the current ratio was less than 1:1 then an equal decline in both would be a DECREASE in current ratio

Inventory Turnover: No effect A/P and Cash do not effect COGS or avg. inventory

Total Debt to Total Assets:
Both Debt and Assets (cash) will go down If the ratio is greater than 1:1 this would increase ratio. If the ration is less than 1:1 this would decrease the ratio

Question 30

What is the affect if you get goods retuned that were not paid for - Current Ratio, Inventory Turnover, Total debt/Total Assets

Answer 30

JE.
Dr. Inventory   5
     cr COGS           5
dr. A/P            10
     cr. A/R               10

So it is assumed that because you sell at a profit that the A/R is greater than the inventory returned 10>5

Current Ratio: Current asset increase by less than current liabilities = a decrease in Current ratio

Inventory Turnover: decrease - cogs sold decreases and same mount that inventory increases

Debt / Assets: Total debt did not change but total assets increase by the inventory = a Increase in the ratio because

Question 31

You record a receivable from an insurance co. and a loss from a fire in a factory

Answer 31

This means that the money form the insurance wont fully cover the inventory you lost so you record a loss

JE:
dr. A/R insurance 500
cr Loss on building 100
cr building 600

Current Ratio:
CA are increase by A/R and current liabilities stay the same = increase in ratio

Inventory turnover:
No effect on either COGS or Inventory

Debt/Assets: no effect on debt, but there is an net decrease in assets (loss) so there would an an increase in the ratio

Question 32

Increase selling price, for a product in demand in excess of capacity - number of units sold is same as last year

Answer 32

Increase of sales and A/R

Current RATIO: Assets increase (A/R) while the liabilities are unchanged = increase in ratio

Inventory Turnover: No effect because inventory did not change

Debt/Asset: debt did not change but increase in assets = decrease in ratio

Question 33

What are SG&A expenses

Answer 33

they include selling, depreciation, legal fees

Question 34

what is the method called segments are part of an entity

Answer 34

segment approach