FAR - F1M2 Flashcards
Each of the following events is required to be reported to the United States Securities and Exchange Commission on Form 8-K, except:
A. The unregistered sale of equity securities.
B. The quarterly results of operations and financial condition of a registrant.
C. The creation of an obligation under an off-balance sheet arrangement of a registrant.
D. A change in a registrant’s certifying accountant.
- Choice “B” is correct. Form 8-K is a form required to be filed by all companies registered with the Securities and Exchange Commission (SEC). The form reports on major corporate events, including corporate asset acquisitions/disposals, accountant changes, financial statement changes, management changes, changes in securities, etc. Quarterly results of operations will be reported using Form 10-Q.
- Choice “A” is incorrect. Changes in securities issued (including sales of equity securities) will be reported on Form 8-K.
- Choice “C” is incorrect. Assuming they are significant, obligations created under an off-balance sheet arrangement will be reported on Form 8-K.
- Choice “D” is incorrect. A change in the registrant’s accountant is significant and will be reported on Form 8-K.
On December 1 of the current year, Clay Co. declared and issued a 6 percent stock dividend on its 100,000 shares of outstanding common stock. There was no other common stock activity during the year. What number of shares should Clay use in determining basic earnings per share for the current year?
A. 100,500.
B. 106,000.
C. 100,000.
D. 103,000.
- Choice “B” is correct. A 6 percent stock dividend equals 6,000 shares with a total of 106,000 shares outstanding after the distribution of the dividend. Stock dividends and stock splits require restatement of the shares outstanding before the stock dividend or stock split. Thus, the stock dividend would be treated as if it had occurred at the beginning of the fiscal year.
- Choice “A” is incorrect. In this calculation, the stock dividend shares are weighted for the one month in which they were outstanding. However, stock dividends are treated as if they had occurred at the beginning of the fiscal year.
- Choice “C” is incorrect. This calculation ignores the fact that 6,000 shares were issued due to the stock dividend.
- Choice “D” is incorrect. Stock dividends are treated as if they had occurred at the beginning of the fiscal year.
Ute Co. had the following capital structure during Year 1 and Year 2:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding: $250,000.
Common stock, $5 par, 200,000 shares issued and outstanding: 1,000,000.
Ute reported net income of $500,000 for the year ended December 31, Year 2. Ute paid no preferred dividends during Year 1 and paid $16,000 in preferred dividends during Year 2. In its December 31, Year 2, income statement, what amount should Ute report as basic earnings per share?
A. $2.45.
B. $2.50.
C. $2.42.
D. $2.48.
- Choice “A” is correct. $2.45 earnings per share.
Year 2
Net income: $500,000
Less: cumulative preferred Stock dividend “requirement” ($10 par × 25,000 shares × 4%): (10,000)
Income available to common shares: 490,000
Divide by average common shares O/S: ÷ 200,000
Basic earnings per common share: 2.45
NOTE: Because the preferred stock dividends are cumulative, when they are declared or paid is not relevant.
- Choice “B” is incorrect. This amount is equal to net income divided by the average common shares outstanding. When calculating basic earnings per share, preferred dividends accumulated during the period on cumulative preferred stock or preferred dividends declared during the period on noncumulative preferred stock must be subtracted from net income to calculate the income available to common shareholders, which is then divided by the average common shares outstanding.
- Choice “C” is incorrect. This answer is calculated by incorrectly subtracting the $16,000 preferred dividend paid in Year 2. When preferred stock is cumulative, the dividend accumulated during the period must be subtracted to calculate basic earnings per share.
- Choice “D” is incorrect. This amount is calculated by incorrectly subtracting preferred dividends of $4,000. This amount is not supported by the question facts.
West Co. had earnings per share of $15.00 for the current year before considering the effects of any convertible securities. No conversion or exercise of convertible securities occurred during the year. However, possible conversion of convertible bonds would have reduced earnings per share by $0.75. The effect of possible exercise of common stock options would have increased earnings per share by $0.10. What amount should West report as diluted earnings per share for the current year?
A. $14.35.
B. $15.10.
C. $15.00.
D. $14.25.
- Choice “D” is correct. $14.25 diluted earnings per share.
Basic EPS
EPS before the effect of any convertibles: $15.00
Possible conversion of bonds: –
Basic EPS: $15.00
Diluted EPS:
EPS before the effect of any convertibles: $15.00
Possible conversion of bonds: (0.75)
Diluted EPS: $14.25
NOTE: The possible exercise of common stock options would increase EPS by $0.10, so they are not used because of the antidilution rule. Each potentially dilutive security is considered separately for its dilutive effect.
- Choice “A” is incorrect. It adds back the possible exercise of options which are antidilutive.
- Choice “B” is incorrect. It does not account for the dilutive convertible bonds and accounts for the possible exercise of options which are antidilutive.
- Choice “C” is incorrect. It does not account for the dilutive convertible bonds.
Ian Co. is calculating earnings per share amounts for inclusion in Ian’s annual report to shareholders. Ian has obtained the following information from the controller’s office as well as shareholder services:
Net income from January 1 to December 31: 125,000
Number of outstanding shares:
January 1 to March 31: 15,000
April 1 to May 31: 12,500
June 1 to December 31: 17,000
In addition, Ian has issued 10,000 incentive stock options with an exercise price of $30 to its employees and a year-end market price of $25 per share. What amount is Ian’s diluted earnings per share for the year ended December 31?
A. $4.85.
B. $7.94.
C. $4.63.
D. $7.35.
- Choice “B” is correct. Ian’s diluted earnings per share will be equal to its basic earnings per share because the stock options are out of the money. Out of the money stock options are antidilutive because the exercise price exceeds the market price of the stock. Ian’s basic and diluted earnings per share are calculated as follows:
Basic (and diluted) EPS = Income available to common shareholders / weighted average number of common shares
Basic (and diluted) EPS = $125,000 / 15,750 = $7.94
The weighted average number of common shares outstanding is:
15,000 x 3/12 = 3,750
12,500 x 2/12 = 2,083
17,000 x 7/12 = 9,917
3,750 + 2,083 + 9,917 = 15,750
- Choices “C”, “A”, and “D” are incorrect, per the above.
A company is an accelerated filer that is required to file Form 10-K with the United States Securities and Exchange Commission (SEC). What is the maximum number of days after the company’s fiscal year end that the company has to file Form 10-K with the SEC?
A. 75 days.
B. 120 days.
C. 60 days.
D. 90 days.
- Choice “A” is correct. In 2002, the SEC approved a deadline of 75 days for Form 10-K “accelerated filers.” An accelerated filer is an issuer:
- With a public float of greater than or equal to $75 million;
- Subject to the Securities Exchange Act’s reporting requirements for greater than or equal to 12 months;
- That previously filed at least one report;
- Which is not eligible to file quarterly and Annual reports on Forms 10-QSB and 10-KSB.
- Smaller reporting companies, which are entities with annual revenues of less than $100 million, are excluded from the definition of large accelerated filers or accelerated filers.
- Choice “C” is incorrect. This is the correct filing period for “large accelerated filers” (those with floats over $700 million).
- Choice “B” is incorrect. This answer is not applicable.
- Choice “D” is incorrect. This is the time period for non-accelerated filers.
Kell Corp.’s $95,000 U.S. GAAP net income for the quarter ended September 30, Year 1, included the following after-tax items:
- A $60,000 gain on sale of equipment, realized on April 30, Year 1, was allocated equally to the second, third, and fourth quarters of Year 1.
- A $16,000 cumulative-effect loss resulting from a change in inventory valuation method was recognized on August 2, Year 1.
In addition, Kell paid $48,000 on February 1, Year 1, for Year 1 calendar year property taxes. Of this amount, $12,000 was allocated to the third quarter of Year 1.
For the quarter ended September 30, Year 1, Kell should report net income of:
A. $103,000.
B. $115,000.
C. $91,000.
D. $111,000.
- Choice “C” is correct. Kell Corp. should report net income of $91,000 for the third quarter ended September 30, Year 1.
- Rules: The entire amount of the gain on sale of equipment should be reported during the period incurred.
- A “cumulative effect” type accounting change is not included in the net income of the period of change; instead, the beginning of the year retained earnings is restated.
- Expenses that benefit more than one interim period, such as property taxes, are allocated among the periods benefited. The $60,000 gain was allocated equally over 3 quarters. Therefore, each quarterly income statement would have a $20,000 gain. However, this gain should be reported during the period incurred (in the second quarter) because it was realized on April 30. As a reminder, the quarterly income statements are not cumulative. In quarter 3, the $20,000 gain reported ($60,000 × 1/3 = $20,000) should be subtracted from net income because this gain belongs to quarter #2.
- The cumulative effect of the change in accounting principle would impact the retained earnings at the beginning of the year and should not be included as part of net income. However, the $16,000 loss was recognized (recorded) on August 2, which reduced the net income of the 3rd quarter. Therefore, an adjustment is needed to add the loss back to net income because the loss should be an adjustment to beginning retained earnings.
- The total property taxes paid were $48,000, which means that $12,000 of property taxes should be allocated to each of the four quarters. However, the fact pattern states that $12,000 was allocated to the third quarter, which means that the $12,000 expense was already included in the calculation of the $95,000 GAAP income, and no further adjustment is needed.
Q3 Income as Originally Calculated: $95,000
Less: 1/3 Gain of Q2 Gain: (20,000)
Subtotal: 75,000
Plus: Cumulative Effect of Accounting Change: 16,000
Corrected Q3 NI: $91,000
- Choice “A” is incorrect. The $12,000 in property taxes for the third quarter are already accounted for in the $95,000 in GAAP net income, so there is no need to adjust for them.
- Choice “B” is incorrect. This answer choice adds the second quarter gain instead of subtracting it and does not account for the cumulative effect of the accounting change.
- Choice “D” is incorrect. This answer choice does not account for the removal of the second quarter $20,000 allocated gain from the equipment sale.
On January 16, Tree Co. paid $60,000 in property taxes on its factory for the current calendar year. On April 2, Tree paid $240,000 for unanticipated major repairs to its factory equipment. The repairs will benefit operations for the remainder of the calendar year. What amount of these expenses should Tree include in its third quarter interim financial statements for the three months ended September 30?
A. $15,000.
B. $95,000.
C. $0.
D. $75,000.
- Choice “B” is correct. For interim reporting purposes, costs that benefit multiple periods should be allocated equally to those periods. The $60,000 in property taxes will benefit the entire calendar year and therefore must be allocated equally to each calendar quarter:
$60,000 / 4 quarters = $15,000 per quarter
The $240,000 in equipment repairs will benefit the company from April - December and therefore should be allocated equally to each the three quarters contained in that period:
$240,000 / 3 quarters = $80,000 per quarter
Therefore, the total of these expenses to be recognized in the quarter ended September 30 is $95,000 ($15,000 allocated property taxes + $80,000 allocated equipment repairs).
- Choice “A” is incorrect. This answer choice does not account for the allocated equipment repair costs.
- Choice “C” is incorrect. This answer choice does not incorporate the $15,000 in allocated property taxes per quarter or the $80,000 in equipment repairs allocated to the three quarters between April and December.
- Choice “D” is incorrect. This answer choice allocates the equipment repairs over all four quarters, rather than three.
A U.S. publicly traded company’s second fiscal quarter ends on March 31. If the company is an accelerated filer, what is the latest date that the 10-Q should be filed with the U.S. SEC?
A. May 15.
B. June 29.
C. May 10.
D. May 30.
- Choice “C” is correct. For large accelerated and accelerated filers, the 10-Q is due within 40 days of the period end. From March 31, that means 30 days in April + 10 days in May = May 10.
- Choice “A” is incorrect. May 15 would be the appropriate date for a non-accelerated filer.
- Choice “B” is incorrect. June 29 is already the end of the next quarter, which would be much too late for the filing of a quarterly financial report.
- Choice “D” is incorrect. May 30 is beyond the due date for the 10-Q for any filer.
Deck Co. had 120,000 shares of common stock outstanding at January 1, Year 2. On July 1, Year 2, it issued 40,000 additional shares of common stock. Outstanding all year were 10,000 shares of nonconvertible cumulative preferred stock. What is the number of shares that Deck should use to calculate Year 2 earnings per share?
A. 150,000.
B. 170,000.
C. 140,000.
D. 160,000.
- Choice “C” is correct. 140,000 shares of common stock is the weighted average for earnings per share. The calculation is as follows:
1-1-Y2: Outstanding all year: 120,000
7-1-Y2: 40,000 issued x 6/12: 20,000
Weighted Average: 140,000
- Choice “A” is incorrect. The preferred stock is not considered because it is nonconvertible.
- Choice “B” is incorrect. The 40,000 shares issued on July 1, Year 2, must be time-weighted for the 6 months of the year that they were outstanding. Also, the preferred stock is not considered because it is nonconvertible.
- Choice “D” is incorrect. The 40,000 shares issued on July 1, Year 2, must be time-weighted for the 6 months of the year (6/12) that they were outstanding.
The following information pertains to Jet Corp.’s outstanding stock for Year 2:
Common stock, $5 par value
Shares outstanding, 1/1/Year 2: 20,000
2-for-1 stock split, 4/1/Year 2: 20,000
Shares issued, 7/1/Year 2: 10,000
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 1/1/Year 2: 4,000
What are the number of shares Jet should use to calculate Year 2 earnings per share?
A. 45,000.
B. 54,000.
C. 40,000.
D. 50,000.
- Choice “A” is correct. 45,000 shares should be used to calculate Year 2 EPS.
1/1/Year 2 Shares outstanding: 20,000
4/1/Year 2 2-for-1 stock split: 20,000
= 40,000 × 1/2 (6 mos) = 20,000
7/1/Year 2 Share issued: 10,000
= 50,000 × 1/2 (6 mos) = 25,000
Weighted-average shares O/S
45,000
Under U.S. GAAP, a stock split is treated as if it occurred at the beginning of the year when calculating weighted-average shares outstanding for EPS.
The stock split occurred on April 1 and is retroactively stated back to January 1, as if it was in effect the entire year.
There are many ways to mathematically arrive at the weighted average. For this question, we could have also calculated:
40,000 × 12/12 = 40,000 (because 40,000 shares were outstanding for the entire 12 months)
10,000 × 6/12 = 5,000 (because the additional 10,000 shares were outstanding for just 6 months)
40,000 + 5,000 = 45,000 weighted average number of shares outstanding.
- Choice “B” is incorrect. This answer choice counts the 4,000 preferred shares and retroactively applies the common stock issuance of 10,000 shares on July 1 rather than on a time-weighted basis. Preferred shares are not included in the EPS calculation, and share issuances should not be accounted for retroactively.
- Choice “C” is incorrect. This answer choice does not account for the 10,000 new common shares issued on July 1.
- Choice “D” is incorrect. This answer choice applies the new share issuance on July 1 retroactively to the start of the year rather than on a time-weighted basis. While stock splits are treated retroactively, new share issuances are not and must be accounted for based on the date they were issued.
Poe Co. had 300,000 shares of common stock issued and outstanding at December 31, Year 1. No common stock was issued during Year 2. On January 1, Year 2, Poe issued 200,000 shares of nonconvertible preferred stock. During Year 2, Poe declared and paid $75,000 cash dividends on the common stock and $60,000 on the preferred stock. Net income for the year ended December 31, Year 2 was $330,000. What should be Poe’s Year 2 earnings per common share?
A. $0.90.
B. $0.65.
C. $1.10.
D. $0.85.
- Choice “A” is correct. $0.90 earnings per common share.
Net income: 330,000
Less: Preferred dividends paid: (60,000)
Income available for common stock: 270,000
EPS = NI - Preferred Dividends / Weighted Shares Outstanding
- Choice “B” is incorrect. Only the preferred dividends, and not the preferred dividends plus the common dividends, should be subtracted to compute income available to common shareholders.
- Choice “C” is incorrect. Preferred dividends must be subtracted to compute income available to common shareholders, the numerator of the EPS formula.
- Choice “D” is incorrect. The preferred dividends of $60,000, not the common stock dividends of $75,000, should be subtracted to compute income available to common shareholders.
A medical technology firm had 18,000 shares of common stock issued and outstanding at the beginning of the year. The following transactions occurred during the year:
April 1: Issued additional 3,000 shares
December 1: Purchased 1,200 shares of treasury stock
How many shares would be used to calculate basic earnings per share?
A. 20,250.
B. 21,000.
C. 20,150.
D. 20,350.
- Choice “C” is correct. The weighted average number of shares outstanding is the average of shares assumed to be outstanding for the year in EPS calculations. Shares sold or reacquired during the period are weighted for the portion of the period they were outstanding. The following calculation properly weights the number of shares outstanding for the medical technology firm:
Beginning of year shares (18,000 × 12/12 months): 18,000
Issued shares (3,000 × 9/12 months): 2,250
Purchased treasury shares (1,200 × 1/12 months): (100)
Weighted average number of shares outstanding: 20,150
- Choice “A” is incorrect. This answer choice properly includes the shares outstanding at the beginning of the year and properly weights the April issuance for the portion of the year the shares were outstanding, but it does not reduce the shares outstanding for the treasury stock buyback on December 1.
- Choice “B” is incorrect. This answer choice properly includes the shares outstanding at the beginning of the year but does not weight the April issuance for the portion of the year the shares were outstanding, nor does it reduce the shares outstanding for the treasury stock buyback on December 1.
- Choice “D” is incorrect. This answer choice properly includes the shares outstanding at the beginning of the year and properly weights the April issuance for the portion of the year the shares were outstanding, but it does not reduce the shares outstanding for the treasury stock buyback on December 1. Instead, the answer choice assumes shares increased due to the treasury shares buyback. When an issuing company buys back outstanding stock, the outstanding share number decreases.
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the following securities would be dilutive?
A. Ten percent convertible bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock.
B. Six percent, $100 par cumulative convertible preferred stock, issued at par, with each preferred share convertible into four shares of common stock.
C. Cumulative 8%, $50 par preferred stock.
D. Seven percent convertible bonds, issued at par, with each $1,000 bond convertible into 40 shares of common stock.
- Choice “D” is correct. A dilutive security will produce an earnings per share number below basic earnings per share. The formula for basic earnings per share is income available to common shareholders divided by the weighted average number of common shares outstanding. Basic earnings per share is $1.29, and a dilutive security will result in a lower earnings per share number. If the seven percent convertible bonds are converted, the company will save $49 on each bond ($1,000 x .07 x (1 - .30)), but 40 new shares of stock will be issued. This equates to $1.225 per 1 new share, which is a lower ratio than $1.29 per share. So, these securities will be dilutive.
- Choice “A” is incorrect. If the ten percent convertible bonds are converted, the company will save $70 on each bond ($1,000 x .10 x (1 - .30)) and 20 new shares of stock will be issued. This equates to $3.50 per 1 new share, which is a higher ratio than $1.29 per share. So, these securities will be anti-dilutive.
- Choice “B” is incorrect. If the convertible preferred stock is converted, the company’s earnings per share will increase in the numerator by the $6 dividend that will no longer be paid, while the denominator will increase by 4 for the new shares of common stock issued. That equates to $1.50 per share, which is higher than $1.29.
- Choice “C” is incorrect. There is no indication given that the shares are convertible, so they will not be dilutive.
Jones Corp.’s capital structure was as follows:
December 31, Year 2
Outstanding shares of stock:
Common: 110,000
Convertible preferred: 10,000
8% convertible bonds: $1,000,000
During Year 2, Jones paid dividends of $3.00 per share on its preferred stock. The preferred shares are convertible into 20,000 shares of common stock. The 8% bonds are convertible into 30,000 shares of common stock. Net income for Year 2 is $850,000. Assume that the income tax rate is 30%.
The diluted earnings per share for Year 2 is:
A. $5.66.
B. $6.26.
C. $5.48.
D. $5.81.
- Choice “A” is correct. $5.66 diluted EPS.
Rule: All potentially dilutive convertible bonds and preferred stock are used in computing diluted EPS.
Adjusted net income:
Net income: $850,000
Add: Interest expense ($1,000,000 x 8%): 80,000
Less: Tax deduction eliminated (30%): (24,000)
Adjusted net income: $906,000
Adjusted shares outstanding:
Shares outstanding - common: 110,000
Conversion of preferred shares: 20,000
Conversion of bonds: 30,000
Adjusted shares outstanding: 160,000
Diluted EPS = Adjusted net income / Adjusted Stockholders’ shares outstanding
Diluted EPS = $906,000 / 160,000 = $5.6625
- Preferred dividends are not subtracted when computing the adjusted net income because we are making the assumption that the preferred shares were converted to common shares at the beginning of the period and, thus, that no preferred dividends were paid.
