Accounting 2 Study Guide - Earnings Per Share

Weighted average number of shares considers all of the above factors. It takes into account the purchases of treasury stock, which reduces the weighted average shares. It also considers the reissuance of treasury stock, which increases the weighted average shares. Additionally, it takes into account stock dividends that are retroactive to the beginning of the year.

Fully diluted EPS is a measure used to calculate the earnings per share of a company, taking into account all potential shares that could be outstanding. This includes the potential conversion of convertible securities, such as stock options or convertible bonds, into common shares. By adjusting the current actual earnings for these potential conversions and considering all potential shares outstanding, the fully diluted EPS provides a more comprehensive and accurate measure of a company's earnings per share.

When the preferred stock is non cumulative and dividends are not declared, preferred dividends are not subtracted from net income when computing EPS. This means that even if the company has preferred stockholders, if the stock is non cumulative and no dividends are declared, it does not affect the calculation of EPS.

Stock dividends are treated retroactively as if they occurred at the beginning of the year

Earnings per share represents the amount of earnings that a company generates for each outstanding common share during a specific period. It is calculated by dividing the net earnings of the company by the number of common shares outstanding. This measure is important for investors as it provides an indication of a company's profitability on a per share basis, allowing for better comparison between companies of different sizes.

A stock split increases the number of shares issued and outstanding . Par Value and Fair Value decrease. The total value ( book value and fair market value does not change. No entry is made and stockholders equity does not change

Stock dividends and stock splits require earnings per share for all prior years presented to be restated because these actions affect the number of shares outstanding and therefore impact the calculation of earnings per share. When a company issues stock dividends or executes a stock split, the number of shares increases, which can impact the earnings per share calculation for previous years. Restating the earnings per share ensures that the financial statements accurately reflect the impact of these actions on the company's performance.

The statement that is always true relative to earnings per share is that the company must report earnings per share for continuing operations and all items reported after continuing operations. This means that the company is required to disclose the earnings per share for both its ongoing operations and any additional items that are reported separately. This ensures transparency and provides investors with a comprehensive understanding of the company's financial performance.

The preferred dividend is computed as total par value (number of shares * par value * par value per share)* stated annual percent . Only dividends that may be declared are deducted from net income

This is only time preferred dividends is not subtracted from net income. NON cumulative means that dividends will not be paid in the future if it was not declared during the current year. The payment will not be made to preferred shareholders and should not be deducted from net income

Stock splits are considered retroactively to the beginning of the year when calculating weight average shares. This means that any additional shares resulting from stock splits are taken into account in the calculation of the weighted average shares. This ensures that the calculation accurately reflects the impact of stock splits on the number of shares outstanding throughout the year.

Fully diluted "EPS" refers to the earnings per share calculation that takes into account all potential dilutive securities, such as stock options, convertible securities, and warrants. It assumes that all these securities are exercised or converted into common shares, which would result in a higher number of shares outstanding and potentially lower earnings per share. Therefore, fully diluted EPS is considered a "worse case scenario" as it represents the lowest possible earnings per share given the current earnings and potential dilution. It provides a more conservative estimate of a company's profitability and is relevant for investors who want a more accurate picture of the company's financial situation.

Fully diluted earnings per share is computed by adjusting basic earnings per share by potential conversions to common stock. This means taking into account the potential dilution effect of convertible securities, such as stock options, convertible bonds, or preferred stock, that can be converted into common stock. By including these potential conversions, the calculation provides a more accurate measure of the company's earnings per share, considering the impact of potential dilution on the existing shareholders.

A company that has a least one convertible security or common stock equivalent is considered to have a complex capital structure. A simple capital structure has no common stock equivalents.

The "treasury stock method" related to stock options assumes that funds received from exercise are used to purchase treasury stock. This means that when employees exercise their stock options, the company uses the money received to buy back its own stock, which is then held as treasury stock. This method is used to calculate the impact of stock options on the company's weighted average shares outstanding.

Dividends relative to non cumulative non convertible preferred stock are only applicable to common shareholders if they have been declared during the current period. If they have not been declared, they should be ignored when determining the income applicable to common shareholders.

When a convertible bond is included in Fully diluted EPS, the interest saved is added to income and the weighted average shares are increased. This is because when a convertible bond is included, it means that the bondholders have the option to convert their bonds into shares of the company's stock. If the bondholders choose to convert, the company no longer has to pay interest on the bonds, resulting in interest savings. These interest savings are added to the company's income. Additionally, the conversion of the bonds into shares increases the number of shares outstanding, which in turn increases the weighted average shares used in the EPS calculation.

The correct answer is "the conversion occurred at the beginning of the year". This means that the conversion of the convertible occurred at the start of the year, and any calculations or analysis should be based on this assumption.

One common method a company uses to increase basic earnings per share is by purchasing treasury stock. When a company buys back its own shares from the open market, it reduces the number of outstanding shares, which in turn increases the earnings per share. This is because the same amount of earnings is divided among a smaller number of shares, resulting in a higher earnings per share ratio. By repurchasing its own shares, a company can also signal confidence in its own stock and potentially increase its market value.

Only non cumulative non declared is not subtracted from net income .

Anti-dilutive occurs when basic EPS is less than fully diluted EPS. This means that if all potential dilutive securities were converted or exercised, the EPS would increase. In other words, the fully diluted EPS takes into account the potential dilution from all convertible securities, options, and warrants, while the basic EPS does not consider these potential dilutive effects. Therefore, if the basic EPS is lower than the fully diluted EPS, it indicates that the potential dilution would increase the EPS if all securities were converted or exercised.

The cash is assumed to be used to purchase treasury stock at average fair market value during the period

The treasury stock method is used to account for stock options when computing diluted earnings per share. The options are assumed exercised with the cash assumed to be used to purchase treasury shares at the average fair market value during the period

When earnings per share is anti-dilutive, it means that including the convertible security in the computation would decrease the earnings per share. In this case, the company must remove the anti-dilutive convertible security from the computation in order to accurately reflect the potential dilution of the company's shares. By doing so, the company reports the basic earnings per share and fully diluted earnings per share as computed without the anti-dilutive convertible security.

Basic weighted average outstanding shares is computed by considering the amount of shares outstanding at various times. This means that the calculation takes into account the number of shares that were outstanding during different periods of time, rather than just the total outstanding shares at the end of a specific period. This is important because it reflects the fluctuations in the number of shares outstanding throughout the year, which can impact the accuracy of financial ratios and earnings per share calculations.

Nonconvertible, cumulative preferred stock where the dividend is not declared impacts the computation of both basic earnings per share and diluted earnings per share. This is because preferred stockholders have a claim on the company's earnings and if the dividends are not declared, it reduces the earnings available to common shareholders. Basic earnings per share is calculated by dividing the net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share takes into account the potential dilution of shares from convertible securities, such as preferred stock. If the dividends on the preferred stock are not declared, it can impact both the numerator and denominator in the calculation of both basic and diluted earnings per share.

The correct answer is "all of the above". This is because the amount of preferred dividends paid can be calculated using any of the three methods mentioned in the options. The first method calculates it based on the total par value of preferred shares multiplied by the stated percentage. The second method calculates it based on the total preferred shares issued multiplied by the par value multiplied by the stated percentage. The third method calculates it based on the stated percentage multiplied by the preferred stock dollars reported on the balance sheet. Therefore, all three methods are correct ways to calculate the amount of preferred dividends paid.

A common stock equivalent is a security that has the potential to increase the number of outstanding common shares. This means that if an investor holds common stock equivalents, the number of shares they hold may increase in the future. This can happen through events such as stock splits, stock dividends, or the exercise of stock options. By increasing the number of outstanding common shares, the company dilutes the ownership stake of existing shareholders.

Diluted weighted average shares include shares that may be issued in the future, based on contingent situations that are likely to occur. This means that if certain conditions are met, such as the exercise of stock options or the conversion of convertible securities, additional shares may be issued. Including these potential shares in the calculation provides a more accurate representation of the company's diluted earnings per share. Therefore, the correct answer is diluted weighted average shares.

A nonconvertible bond does not change net income or weighted average shares outstanding when computing basic or diluted earnings per share

When a company retires common stock that was previously held as treasury stock, there is no impact on earnings per share. This is because treasury stock does not have voting rights and does not receive dividends, so retiring it does not affect the number of shares outstanding or the earnings of the company. Therefore, there is no change in earnings per share.