M1 - Earnings Per Share

Question 1

Preferred stock is not considered in the calculation of number of shares to use when calculating earnings per share when?

Answer 1

When the preferred stock is nonconvertible.

Question 2

Contingent shares (that are dilutive) are included in the calculation of basic earnings per share (EPS) if (and as of the date) all conditions for issuance are met. (true or false)

Answer 2

True

Question 3

Stock options do not enter into the calculation of EPS. (true or false)

Answer 3

True

Question 4

Stock options will enter into the calculation of dilutive EPS if dilutive. (true or false)

Answer 4

True

i.e., the average market price of the common stock during the period exceeds the exercise price of the option.

Question 5

Contingent shares are included in the calculation of basic EPS as of the date all conditions have been satisfied. (true or false)

Answer 5

True

If it happened May 1 you would calculate 8 months/12Months x the contingent shares

Question 6

In computing the weighted-average number of shares outstanding for earnings per share (EPS) determination, a stock dividend (or stock split) to the same class of shareholders must be retroactively recognized and treated as if it had occurred at the beginning of the year. (true or false)

Answer 6

True

In addition, EPS for all prior periods presented must be adjusted as though the shares had been outstanding for the entire period presented.

Question 7

When calculating EPS, if the preferred stock dividends are cumulative, it is not relevant of when they are paid or declared. (true or false)

Answer 7

True

Question 8

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. (true or false)

Answer 8

True

Question 9

EPS disclosures are required for all companies with publicly traded common stock or potential common stock including what:

Answer 9

Stock options
Stock warrants
Convertible securities
“contingent stock” agreement

Also required by companies that have made a filing or are in the process of filing with a regulatory agency (e.g., the SEC) in preparation for a public sale of common stock.

Question 10

Shares issuable upon the exercise of a stock option ARE considered contingent shares as the option holder is required to pay the strike price to exercise the options. (true or false)

Answer 10

FALSE, they are NOT considered contingent shares.

Shares issuable upon the passage of a specific period of time
Shares issuable upon the issuance of a patent
Shares issuable upon achieving a specific net income target
These are all considered contingent shares as they are issuable for no cash consideration after the occurence of the specified condition.

Question 11

When computing basic EPS, convertible securities are ignored for purposes of computing the weighted average of common shares outstanding. (true or false)

Answer 11

true

Question 12

Interest expense (net of income tax) on convertible debt that is dilutive would be added back to the numerator for diluted EPS if the effects are dilutive. (True or false)

Answer 12

true

It will be ignored for basic earnings per share

Question 13

When computing diluted earnings per share, convertible securities are:

Answer 13

Recognized only if they are dilutive.

Question 14

Only preferred dividends must be subtracted from net income on calculating EPS. (true or false)

Answer 14

true

Common stock dividends should not be subtracted to compute income available to common shareholders.

Question 15

What is the formula to calculate EPS?

Answer 15

Weighted Average # of Common shares outstanding

Question 16

All potentially dilutive convertible bonds and preferred stock are used in computing diluted EPS. (true or false)

Answer 16

True

Question 17

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. (true or false)

Answer 17

true

Question 18

Would dilutive stock options be used in the calculation of both basic EPS and diluted EPS?

Answer 18

No, just diluted EPS

Question 19

If the stock options are considered “out of the money”, they are (dilutive or antidilutive?)?

Answer 19

Antidilutive because the exercise price exceeds the market price of the stock.

Question 20

Under US GAAP, EPS data should be reported for:

Answer 20

Discontinued Operations & Continued Operations

Question 21

The treasury stock method presumes that option proceeds can be used to reacquire shares on the open market and that any option requirement will be satisfied by the issuance of new shares to be held in the treasury. Treasury shares themselves do not have an impact on the calculation. (true or false)

Answer 21

True

Question 22

What is the formula used to calculate the dilutive effect of options using the treasury stock method?

Answer 22

Number of shares - [(Number of shares x exercise price)/average market price] =

This = the additional shares outstanding

Question 23

True or False: Income available to common shareholders is determined by deducting dividends declared in the period on non-cumulative preferred stock (regardless of whether they have been paid) and dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared).

Answer 23

True

Question 24

Earnings per share for what must be reported on the face of a public company’s income statement?

Answer 24

Income from continuing operations