Kieso Ch 16 Intermediate Accounting
Earnings Per Share, Diluitive Securities
Questions and Answers
- 1.
Earnings per share is calculated for
- A.
Preferred stock
- B.
Common stock
- C.
Callable stock
- D.
Divisible stock
Correct Answer
B. Common stockExplanation
Earnings per share is calculated for common stock because it represents the ownership interest in a company and is the most widely held type of stock. The earnings per share metric is important for investors as it measures the profitability of a company on a per-share basis. It is calculated by dividing the company's net income by the average number of outstanding common shares. This allows investors to compare the earnings potential of different companies and make informed investment decisions. Preferred stock, callable stock, and divisible stock are not typically used in the calculation of earnings per share.Rate this question:
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- 2.
A simple capital structure consists of
- A.
Only of common stock
- B.
No potential common stock that could dilute earnings no additional common stock which could lower eps
- C.
Securities that could have a diluitive effect
- D.
A and b
Correct Answer
D. A and bExplanation
A simple capital structure consists only of common stock and no potential common stock that could dilute earnings. This means that there are no other types of securities or financial instruments that could potentially dilute the ownership or earnings per share of the common stockholders. In other words, the company's ownership and earnings are solely based on the common stock, without any additional securities that could have a dilutive effect. The correct answer is a and b because both statements are true for a simple capital structure.Rate this question:
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- 3.
EPS is deplayed for each component except
- A.
Income from continuing operations
- B.
Discontinued operations
- C.
Extraordinary items
- D.
None of the above
Correct Answer
D. None of the aboveExplanation
EPS stands for Earnings per Share, which is a financial metric used to measure the profitability of a company. It is calculated by dividing the earnings available to common shareholders by the average number of outstanding shares. EPS is reported for each component mentioned in the question, including income from continuing operations, discontinued operations, and extraordinary items. Therefore, the correct answer is "none of the above" as EPS is displayed for all these components.Rate this question:
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- 4.
The treasury stock method applies to
- A.
Common stock
- B.
Treasury stock
- C.
Stock options and warrants
Correct Answer
C. Stock options and warrantsExplanation
The treasury stock method is a way to calculate the impact of stock options and warrants on the company's diluted earnings per share (EPS). It assumes that the company will use the proceeds from exercising these options and warrants to repurchase its own shares in the open market. By including the potential impact of these transactions, the treasury stock method provides a more accurate representation of the company's diluted EPS. Therefore, the correct answer is stock options and warrants.Rate this question:
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- 5.
The treasury stock method uses the following calculation
- A.
(Average Market Price-Option Price)/Average Market Price
- B.
(Market Price-Option Price)/Market Price
- C.
(Average Market Price-Option Price)/Market Price
- D.
(Market Price-Option Price)/Average Market Price
Correct Answer
A. (Average Market Price-Option Price)/Average Market PriceExplanation
The treasury stock method calculates the potential dilution of earnings per share (EPS) from stock options and warrants. It assumes that the company will use the proceeds from exercising these options to repurchase its own shares at the average market price. The formula (Average Market Price-Option Price)/Average Market Price represents the potential reduction in EPS if the options are exercised and the shares are repurchased at the average market price. By dividing the difference between the average market price and the option price by the average market price, we can determine the potential dilution effect on EPS.Rate this question:
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- 6.
Which of the following is not a potentially dilutive security?
- A.
Warrants
- B.
Options
- C.
Contingent shares
- D.
Convertible bonds or preferred stock
- E.
Option for $25 when market price is $20
Correct Answer
E. Option for $25 when market price is $20Explanation
The option for $25 when the market price is $20 is not a potentially dilutive security because it has a strike price higher than the current market price. This means that the option holder would not exercise the option as they can buy the stock at a lower price in the market. Therefore, this option does not have the potential to dilute the ownership of existing shareholders.Rate this question:
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- 7.
Which is not a feature of a convertible bond...?
- A.
Entices investor with lower interest rate
- B.
Get capital without giving up ownership control
- C.
Entices investors with a higher interest rate
Correct Answer
C. Entices investors with a higher interest rateExplanation
A convertible bond is a type of bond that can be converted into a predetermined number of shares of the issuer's common stock. It typically offers a lower interest rate compared to non-convertible bonds, which is intended to entice investors. Additionally, it allows the issuer to raise capital without giving up ownership control. However, enticing investors with a higher interest rate is not a feature of convertible bonds.Rate this question:
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- 8.
Compensation is expense is recognized for which method of stock option accounting
- A.
Intrinsic value
- B.
Fair value
Correct Answer
B. Fair valueExplanation
In stock option accounting, the fair value method is used to recognize compensation expense. This means that the expense is based on the fair value of the stock options granted to employees. The fair value takes into consideration various factors such as the current stock price, exercise price, expected volatility, and time to expiration. By using the fair value method, companies can accurately reflect the value of the stock options granted to employees as an expense on their financial statements. This provides a more transparent and accurate representation of the company's financial position.Rate this question:
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- 9.
Compensation expense equals the FMV of the stock minus the exercise price on the date of grant
- A.
Par value
- B.
Intrinsic value
- C.
Fair value
Correct Answer
B. Intrinsic valueExplanation
The correct answer is intrinsic value because it represents the true value of the stock option. Intrinsic value is calculated by subtracting the exercise price from the fair market value (FMV) of the stock on the date of grant. This calculation determines the amount of profit or gain that the employee will receive if they exercise the option. Therefore, the compensation expense is equal to the intrinsic value of the stock option.Rate this question:
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- 10.
Total compensation compute is based on the fair value of the options expected to vest on date optiosn granted to employees
- A.
Par value
- B.
Intrinsic value
- C.
Fair value
Correct Answer
C. Fair valueExplanation
The correct answer is fair value. Total compensation is calculated by considering the fair value of the options that are expected to be vested on the date the options are granted to employees. This means that the company takes into account the estimated worth of the options at the time they are granted, rather than their par value or intrinsic value. Fair value is a more comprehensive and accurate measure of the value of the options, as it takes into account various factors such as market conditions and expected future performance of the company.Rate this question:
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- 11.
When instrinsic value is used a footnote disclosure is required for what impact would have been if fair value method was used
- A.
True
- B.
False
Correct Answer
A. TrueExplanation
When intrinsic value is used instead of fair value method, a footnote disclosure is required to provide information about the impact that would have occurred if the fair value method had been used. This is because the fair value method is considered to be a more accurate measure of an asset's value, and disclosing the impact helps users of the financial statements understand the potential differences in valuation methods. Therefore, the statement "true" is the correct answer.Rate this question:
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- 12.
Compensation expense is not reported if
- A.
Substantially all employees may participate
- B.
Discount from market place is small
- C.
Plan offers no substantive option feature
- D.
All of the above
Correct Answer
D. All of the aboveExplanation
The correct answer is "all of the above." Compensation expense is not reported if substantially all employees may participate, if the discount from the market place is small, or if the plan offers no substantive option feature. In these situations, the company may not be required to recognize the expense related to employee compensation.Rate this question:
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