Exam 20: Earnings Per Share

Charlotte Engineering had net income of $450,000 for the year. It declared $30,000 in preferred dividends on December 23. It began the year with 600,000 common shares outstanding. On July 1, Charlotte declared a 10% common stock dividend. Compute the weighted-average common shares outstanding for the year.

When a potentially dilutive security is present, a company must test the security to see if it is dilutive or antidilutive. Antidilutive securities occur when diluted EPS is ________.

When is a potentially dilutive security dilutive?

If convertible debt is issued during the year, the total interest expense for the entire year must be added to the numerator of the diluted EPS calculation.

McManus Inc. reported net earnings of $800,000 for the year. McManus has 200,000 shares of common stock outstanding all year. On March 31, the company granted 40,000 stock options that allow employees to purchase 40,000 shares for $15 each. The company stock has averaged $20 in the market during the year. Compute the basic and diluted EPS.

Austin Products reported $340,000 net income for the year with 100,000 common shares outstanding all year. Austin issued 26,000 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. (Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

Companies are required to provide basic EPS on the income statement for each period for which they provide financial information.

Charlotte Engineering reported net income of $400,000 for the year. It declared $30,000 in preferred dividends on December 23. It began the year with 100,000 common shares outstanding. On July 1, Charlotte declared a 5% common stock dividend. Compute the basic EPS for the year. (Round your answer to the nearest cent.)

Which one of the following is required in the notes to the financial statements for EPS?

Footnote disclosures for EPS are concerned only with current and prior years, such that subsequent events after the close of the year are ignored.

Describe how users utilize the EPS ratios.

A complex capital would include only convertible debt and convertible preferred stock.

A simple capital structure contains no potentially dilutive securities.

Medical Instruments reported $7,000,000 in net income for the current year. The company had $6,000,000 of 8% cumulative, non-convertible preferred stock outstanding all year, and issued $10,000,000 of 7% convertible bonds on July 1. Each $1,000 bond is convertible into 30 shares of common stock. Common shares outstanding at the beginning of the year was 1,000,000, but on December 15, the company declared a 2 for 1 stock split. Compute both basic and diluted EPS when the tax rate is 40%.

The retroactive assumption for stock splits and stock dividends assumes that all splits and stock dividends occur at the beginning of the year, if the stock is outstanding at the beginning of the year. The retroactive assumption is also retroactive to ________.

Accounting standards require which one of the following groups of presentations on the income statement?

U.S. GAAP assumes that all potential dilutive shares in diluted earnings per share computations use the treasury stock method.

Baker Instruments reported $7,000,000 in net income for the current year. The company had $500,000 of 10% cumulative, non-convertible preferred stock outstanding all year, and issued $1,000,000 of 6% convertible bonds on June 1. Determine the numerator for both basic and diluted EPS when the tax rate is 40%.

Ace Corporation has 10,000 shares of $100, 5%, convertible preferred shares outstanding for the whole year. Each preferred share is convertible into 2 shares of common stock. What is the incremental income per common share from the preferred stock?

Why should shareholders pay attention to the diluted EPS?