Accounting 2 Study Guide - Earnings Per Share

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  • 1/31 Questions

    When a company's preferred shares are non cumulative and a dividend is not declared, basic earnings per share is computed with 

    • A deduction from net income for the stated preferred dividends
    • An addition to net income for the stated preferred dividends
    • A deduction from net income for the amount expected to be declared
    • Net income is not adjusted for the stated preferred dividend
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Accounting Quizzes & Trivia
About This Quiz

When you see a company listed in the stock exchange market it shows that it is expected to offer its shareholders dividends quarterly, semiannually or annually. How much do you understand the concept of earnings per share? Take up this simple quiz below and refresh your memory. All the best!

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  • 2. 

    Which of the following is always true relative to earnings per share?

    • Earnings per share will never be a negative amount

    • Earnings per share is always one amount representing net income

    • The company must report earnings per share for continuing operations and all items reported after continuing operations

    • All companies , public, private, and non profit must report earning per share.

    Correct Answer
    A. The company must report earnings per share for continuing operations and all items reported after continuing operations
    Explanation
    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.

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  • 3. 

    When a company declares a stock split 

    • The number of shares outstanding does not change

    • The number of shares issued is decreased

    • The number of shares issued and outstanding is increased

    • Total shareholder's equity increases

    Correct Answer
    A. The number of shares issued and outstanding is increased
    Explanation
    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

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  • 4. 

    When computing weighted average per shares, a stock dividend is treated as if it were declared and paid

    • At the end of the current year

    • On the date it was paid

    • At the beginning of the subsequent year

    • At the beginning of the current year

    Correct Answer
    A. At the beginning of the current year
    Explanation
    Stock dividends are treated retroactively as if they occurred at the beginning of the year

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  • 5. 

    A company with a complex structure must have how many convertible securities?

    • At least one

    • At least 2

    • 3 or more

    • 5 or more

    Correct Answer
    A. At least one
    Explanation
    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.

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  • 6. 

    The computation of basic earnings per share does not consider

    • Outstanding common shares

    • Cumulative preferred stock dividends declared

    • Non convertible preferred stock dividends

    • None of the above

    Correct Answer
    A. None of the above
    Explanation
    Only non cumulative non declared is not subtracted from net income .

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  • 7. 

    What method is used to account for stock options when computing diluted earnings per share?

    • If converted method

    • Treasury stock method

    • Option method

    • Diluted method

    Correct Answer
    A. Treasury stock method
    Explanation
    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

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  • 8. 

    When a bond is nonconvertible, the calculation of which of the following is impacted 

    • Basic earnings per share

    • Diluted earnings per share

    • Both basic and diluted earnings per share

    • Neither basic or diluted earnings per share

    Correct Answer
    A. Neither basic or diluted earnings per share
    Explanation
    A nonconvertible bond does not change net income or weighted average shares outstanding when computing basic or diluted earnings per share

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  • 9. 

    The amount of preferred dividends deducted from net income in the basic earnings per share computing basic or diluted earnings per share 

    • Total par value x the standard discount rate

    • Total preferred shares x par value per share

    • Total preferred shares x par value per share * stated rate

    • Par value per share x stated rate

    Correct Answer
    A. Total preferred shares x par value per share * stated rate
    Explanation
    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

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  • 10. 

    The computation of diluted earning per share assumed cash recieved from the exercise of stock options is used to purchase common stock at

    • Fair market value at the end of the year

    • Book value at the end of the year

    • Average fair market value during the period

    • Average book value during the period

    Correct Answer
    A. Average fair market value during the period
    Explanation
    The cash is assumed to be used to purchase treasury stock at average fair market value during the period

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  • 11. 

    Earnings per share represents 

    • Earnings per common share outstanding for the period

    • Earnings per all shares of stock issued during the period

    • Cumulative earnings per share

    • Earning per share authorized for the period

    Correct Answer
    A. Earnings per common share outstanding for the period
    Explanation
    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.

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  • 12. 

    Basic weighted average outstanding shares is computed by considering 

    • The amount of shares outstanding at various times

    • The average shares issued during the year

    • All convertible security that could potentially be issued

    • Total outstanding shares at the end of a period

    Correct Answer
    A. The amount of shares outstanding at various times
    Explanation
    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.

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  • 13. 

    The amount of preferred dividends paid is calculated as 

    • Total par value of preferred shares * stated %

    • The total preferred shares issued * par value * stated %

    • The stated % * preferred stock dollars reported on the balance sheet

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    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.

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  • 14. 

    Weighted average number of shares considers 

    • Purchases of treasure stock a reduction to weighted average shares

    • Reissuance of treasury stock an increase to weighted average shares

    • Stock dividends retroactive to the beginning of the year

    • All of the above

    Correct Answer
    A. All of the above
    Explanation
    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.

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  • 15. 

    Fully diluted "EPS" is often 

    • A " worse case scenario" given current earnings

    • Very aggressive

    • A more accurate picture of the current situation

    • Not relevant to a potential investor

    Correct Answer
    A. A " worse case scenario" given current earnings
    Explanation
    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.

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  • 16. 

    Fully diluted EPS is computed using

    • Current actual earnings and current actual shares outstanding

    • Current actual earnings adjusted for potential conversions and all potential shares outstanding given current convertible securities

    • Projected earnings and current actual shares outstanding

    • Current actual earnings and all potential shares outstanding given all future convertible securities

    Correct Answer
    A. Current actual earnings adjusted for potential conversions and all potential shares outstanding given current convertible securities
    Explanation
    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.

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  • 17. 

    When a convertible bond is included in Fully diluted EPS 

    • Interest expense is subtracted from income and weighted average shares are reduced

    • Interest expense is included in income and weighted average shares are reduced

    • Interest saved is added to income and weighted average shares are reduced

    • Interest saved is added to income and weighted average shares are increased

    Correct Answer
    A. Interest saved is added to income and weighted average shares are increased
    Explanation
    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.

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  • 18. 

    Preferred dividends are not subtracted from net income when computing eps when 

    • The preferred stock is cumulative and dividends are not declared

    • The preferred stock is non cumulative and dividends are not declared

    • The preferred stock is cumulative and dividends are declared

    • The preferred stock is non cumulative and dividends are declared

    Correct Answer
    A. The preferred stock is non cumulative and dividends are not declared
    Explanation
    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.

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  • 19. 

    THe "if converted" method assumes 

    • The conversion occurred at the beginning of the year

    • The conversion occurred at the end of the year

    • The conversion only occurs if the convertible is anti-dilutive

    • The convertible was not converted this period

    Correct Answer
    A. The conversion occurred at the beginning of the year
    Explanation
    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.

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  • 20. 

    The " treasury stock method"  related to stock options assumes 

    • Funds received from exercise are used to repay debt

    • Funds received from exercise are used to purchase treasury stock

    • Funds received from exercise are used retire treasury stock

    • Treasury stock is purchased which increases weighted average shares

    Correct Answer
    A. Funds received from exercise are used to purchase treasury stock
    Explanation
    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.

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  • 21. 

    A common stock equivalent is a security that 

    • Has the potential to decrease outstanding common shares

    • Has the same fair market value as the common stock

    • Carries voting right equivalent to the common stock

    • Has the potential to increase outstanding common shares

    Correct Answer
    A. Has the potential to increase outstanding common shares
    Explanation
    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.

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  • 22. 

    Anti- dilutive occurs when 

    • Basic eps is greater than fully diluted eps

    • Basic eps is less than fully diluted eps

    • Basic eps is equal to fully diluted eps

    • Convertible securities are not included in fully diluted eps

    Correct Answer
    A. Basic eps is less than fully diluted eps
    Explanation
    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.

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  • 23. 

    When earnings per share is anti- dilutive the company must 

    • Remove the anti-dilutive convertible security from the computation

    • Report basic eps and fully diluted eps as computed

    • Only report basic eps

    • None of the above

    Correct Answer
    A. Remove the anti-dilutive convertible security from the computation
    Explanation
    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.

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  • 24. 

    When calculating weight average shares, stock splits

    • Are not considered in the weighted average shares calculation

    • Are included by adding the additional shares to the total calculation

    • And stock dividends are not considered

    • Are considered retroactively to the beginning of the year

    Correct Answer
    A. Are considered retroactively to the beginning of the year
    Explanation
    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.

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  • 25. 

    Fully diluted earnings per share is computed by 

    • Ignoring basic earnings per share and doing an entirely different calculation

    • Adjusting basic earnings per share by potential conversions to common stock

    • Adjusting basic earnings per share for income generated from stock options

    • Adjusting basic earnings per share for additional interest expense

    Correct Answer
    A. Adjusting basic earnings per share by potential conversions to common stock
    Explanation
    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.

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  • 26. 

    Which of the following requires earnings per share for all prior years presented to be restated?

    • Issuing stock options to employees

    • Stock dividends and stock splits

    • The conversion of convertible bonds

    • Convertible preferred stock

    Correct Answer
    A. Stock dividends and stock splits
    Explanation
    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.

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  • 27. 

    What is the impact to earnings per share when a company retires common stock that was previously held as treasury stock 

    • Increase

    • Decrease

    • No change

    • Depends on when during the period the common stock retired

    Correct Answer
    A. No change
    Explanation
    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.

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  • 28. 

    What is a common method a company uses to increase basic earnings per share ?

    • Purchase treasury stock

    • Issue a stock split

    • Issue convertible bonds that pay interest

    • Do not declare a stated divided on cumulative preferred stock

    Correct Answer
    A. Purchase treasury stock
    Explanation
    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.

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  • 29. 

    Nonconvertible, cumulative preferred stock where the dividend is not declared impacts the computation of 

    • Basic earnings per share

    • Diluted earnings per share

    • Both a and b

    • Neither a or b

    Correct Answer
    A. Both a and b
    Explanation
    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.

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  • 30. 

    Shares that may be issued given a contingent situation that is likely to occur are included in

    • Basic weighted average shares

    • Diluted weighted average shares

    • Both a and b

    • None of the above

    Correct Answer
    A. Diluted weighted average shares
    Explanation
    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.

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  • 31. 

    When determining the income that is applicable to common shareholders, dividends relative to non cumulative non convertible preferred stock would be

    • Added to net income

    • Subtracted to net income

    • Ignored unless it was declared during the current period

    • Ignored unless it was paid during the current period

    Correct Answer
    A. Ignored unless it was declared during the current period
    Explanation
    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.

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  • Current Version
  • Mar 21, 2023
    Quiz Edited by
    ProProfs Editorial Team
  • Dec 05, 2011
    Quiz Created by
    Marygolddk

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