Question

Listed below are several terms and phrases associated with earnings per share. Pair each item from List A with the item from List B (b letter) that is most appropriately associated with it. a e List A List B 1. Subtract preferred dividends. a. Options exercised. 2. Time weighted by 5/12 b. Simple capital structure. 3. Time-weighted shares assumed issued plus time-weighted actual shares c Basic EPS. 14. Midyear event treated as if it occurred at the beginning of the reporting period. d. Convertible preferred stock 5. Preferred dividends do not reduce earnings. e. Earnings available to common shareholders 16. Single EPS presentation 1 Antidilutive. 7 Stock split 9. Increased marketability 8 Potential common shares h Discontinued operations. 9. Exercise price exceeds market price Stock dividend 10. No dilution assumed Add after-tax interest to numerator 11 Convertible bonds k Diluted EPS 12 Contingently issuable shares Noncumulative, undeclared preferred dividends 13. Masamum potential dilution Common shares retired at the beginning of August Shown between per share amounts for net income and for income from continuing operations Include in diluted EPS when conditions for issuance are met m h

Answer 1

ANSWER

As per the given question,

Earnings per Share (EPS) The share or portion of profit earned by each share for company is called as earnings per share.

Match the items in List A with List B 1 Answer (e) Justification: Since preferred dividends are distributed to preference stockholders, preferred dividends would be subtracted from net income while calculating EPS. This justifies EPS computation, which is the earnings available only to common stockholders.

2 Answer: m Justification: Common shares are time-weighted to compute weighted average of common shares. Therefore, shares that are either retired or reacquired would be on August 1 and are time-weighted by 5 12

3. Answer: (a) Justification: When stock options are exercised, the weighted average of shares of those shares is assumed as issued along with the actual weighted average of original shares.

4. Answer: i Justification: Stock dividend shares are computed on the original number of shares at the beginning of the year irrespective of their issue in the mid-year.

5 Answer: ( Justification: The non-cumulative shares do not accumulate the preferred dividends as arrears when the dividends are not declared. So, preferred dividends do not reduce the earnings.

6 Answer: (b Justification: For a simple capital structure when there are no outstanding potential shares, a basic EPS is computed.

7 Answer g Justification: The number of shares increases when stock split is distributed and this effect on EPS is not considered as diluted instead increases marketability.

8 Answer: (d) Justification: Conversion of preferred stock or bonds into common shares is considered as potential increase in the number of common shares.

9 Answer (f) Justification: If exercise price of options exceeds market price, the number of shares assumed to be reacquired would be less. This increases the denominator value of EPS.

10 Answer (c) Justification: If dilution is not assumed, the potential shares would not be there. So, basic EPS would be computed and diluted EPS is not necessary

11 Answer: Justification: When the convertible bonds are converted to common shares, the interest on bonds is avoided and is a savings which is added to the net income (numerator in the formula of EPS).

12. Answer: (n Justification: The contingently issuable shares are issued when the conditions in the agreements are met. This would increase the potential shares and eventually included in computation of diluted EPS.

13. Answer: (k) Justification: The potential shares signify the increase in the number of shares and so are included in the computation of EPS

14. Answer: (h Justification: Discontinued operations per share amount is presented in between net income per share amount and income from continuing operations' per share amount because proceeds from discontinued operations are added to income from continuing operations to arrive at net income

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