Exam 20: Earnings Per Share

Why does the numerator of the basic EPS formula subtract the amount of preferred dividends for some preferred shares and not for others?

When applying the if-converted assumption, the company assumes conversion at the beginning of the year when a convertible bond or convertible preferred stock is issued during the year.

The retroactive assumption for stock dividends and splits helps financial statement users to ________.

Convertible securities in a capital structure may require the adjustment of both the numerator and denominator of the basic EPS formula.

Austin Products reported $330,000 net income for the year with 100,000 common shares outstanding all year. Austin also had 24,000 shares of $100, 8% convertible preferred shares outstanding all year. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

When is a potentially dilutive security antidilutive?

A security is antidilutive if decreases the diluted EPS below basic EPS.

Edmond Biometrics reported net income of $200,000 for both last year and the current year. The shares outstanding for the prior year were 100,000 shares for the whole year. On December 1 of the current year, Edmond declared a two for one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2. (Round your answer to the nearest cent.)

Realty1 has 40,000 outstanding stock options. Its net income for the year is $250,000. Each option allows the holder to purchase a share of stock for $8. The average market value of the shares for the year was $17. What is the incremental income per common from the options?

Stock options and warrants affect the diluted EPS calculation by changing the ________.

When computing diluted EPS, only the denominator is affected by ________.

When companies release EPS information, it does not influence stock prices.

Austin Products reported $330,000 net income for the year with 100,000 common shares outstanding all year. Austin issued 20,000 shares of $100, 8% convertible preferred shares on March 1. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

If a company provides basic and diluted EPS on the income statement for each year presented, it has no further information requirements.

Hudson Motors reported $735,000 net income for the current year. Beginning common shares outstanding were 120,000. Hudson also had 10,000, 6% nonconvertible, cumulative, $100 par value preferred shares outstanding for the entire year. No cash dividends were declared. Compute basic earnings per share. (Round your answer to the nearest cent.)

Smythe, Inc. has four potentially dilutive securities. Computation of the antidilution sequencing recorded the following: Security Increase in Income Increase in Common Shares Convertible Preferred Stock \ 40,000 10,000 Stock Warrants \ 0 1,000 Stock Options \ 0 14,000 Convertible Bonds \ 17,000 5,000 What is the correct order of entry into the EPS computation? (Round any calculations to the nearest cent.)

Antidilutive securities are excluded from the diluted EPS equation.

Describe how managers can manipulate EPS to increase their compensation and give at least three examples.

Kansas Instruments reported $7,000,000 in net income for the current year. The company had $7,000,000 of 9% cumulative, non-convertible preferred stock outstanding all year, and issued $5,000,000 of 7% convertible bonds on May 1. Each $1,000 bond is convertible into 40 shares of common stock. Common shares outstanding all year were 2,000,000. Compute both basic and diluted EPS when the tax rate is 40%.

Normally dilutive securities will become antidilutive if income from continuing operations is a net loss.