Ch 19- Share Based Compensation and Earnings Per Share

Basic earnings per share ignores: A. All potential common shares. B. Some potential common shares, but not others. C. Dividends declared on noncumulative preferred stock. D. Stock splits.

A. All potential common shares.

A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be: A. Deducted from earnings for the year. B. Deducted, net of tax effect, from earnings for the year. C. Added to earnings for the year. D. Ignored.

A. Deducted from earnings for the year.

When computing diluted earnings per share, which of the following will be omitted from the calculation? A. Dividends paid on common stock. B. The weighted average common shares. C. The effect of stock splits. D. The number of common shares represented by stock purchase warrants.

A. Dividends paid on common stock.

When computing earnings per share, noncumulative preferred dividends not declared should be: A. Ignored. B. Deducted from earnings for the year. C. Added to earnings for the year. D. Deducted, net of tax effect, from earnings for the year.

A. Ignored.

The most important accounting objective for executive stock options is: A. Measuring and reporting the amount of compensation expense during the service period. B. Measuring their fair value for balance sheet purposes. C. To disclose increases or decreases in the stock options held at the end of each accounting period. D. None of these is correct.

A. Measuring and reporting the amount of compensation expense during the service period.

Preferred dividends would not be subtracted from earnings when computing earnings per share in a year when the dividends are not declared if the preferred stock is: A. Noncumulative. B. Convertible. C. Participating. D. Cumulative.

A. Noncumulative.

Cracker Company had 2 million shares of common stock outstanding all through 2010. On April 1, 2011, an additional 100,000 shares were sold and issued. On September 30, 2011, Cracker declared a 2-for-1 stock split. Net income in 2011 and 2010 was $10 million and $8 million, respectively. In the 2011, comparative financial statements, EPS would be reported as: A. Option A B. Option B C. Option C D. Option D

A. Option A

If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to: A. Reverse related entries previously made. B. Do nothing. C. Prepare correcting entries. D. Record an income item.

A. Reverse related entries previously made.

Which of the following will require a recalculation of weighted-average shares outstanding for all years presented? A. Stock dividends and stock splits. B. Stock dividends but not stock splits. C. Stock splits but not stock dividends. D. Stock rights.

A. Stock dividends and stock splits.

In computing diluted earnings per share, the treasury stock method is used for: A. Stock warrants. B. Stock splits. C. Reverse stock splits. D. Convertible preferred stock.

A. Stock warrants.

When we assume conversion of convertible bonds, the numerator is increased by: A. The amount of after-tax interest. B. The gross amount of interest. C. The weighted-average interest. D. The amount of cash paid during the current year for interest.

A. The amount of after-tax interest.

The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at: A. The average market price for the reporting period. B. The market price at the end of the period. C. The purchase price stated on the options. D. The stock's par value.

A. The average market price for the reporting period.

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2011. On April 1, 2011, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2011. What is the effect of the options? A. The options are anti-dilutive. B. The options will dilute EPS by $.09 per share. C. The options will dilute EPS by $.33 per share. D. The options will dilute EPS by $.17 per share.

A. The options are anti-dilutive.

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except: A. The shares are deducted rather than added. B. The shares are added rather than deducted. C. The shares are treated as being acquired at the end of the year. D. The shares are treated as being acquired at the beginning of the year.

A. The shares are deducted rather than added.

Stock options, rights, and warrants are different from convertible securities in that they: A. Typically increase cash upon exercise. B. Usually reduce total assets upon exercise. C. Often reduce liabilities upon exercise. D. Normally increase retained earnings upon exercise.

A. Typically increase cash upon exercise.

Under U.S. GAAP, a deferred tax asset for stock options A. is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense. B. is the portion of the options' intrinsic value earned to date times the tax rate. C. is the tax rate times the fair value of all the options. D. isn't created if the award is "in the money;" that is, it has intrinsic value.

A. is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.

If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued: A. At the end of the year. B. At the beginning of the year. C. On the declaration date. D. On the date of distribution.

B. At the beginning of the year.

A primary goal of earnings per share determination is: A. Conservatism. B. Comparability. C. Materiality. D. Objectivity.

B. Comparability.

Contingently issuable shares may be included in: A. Basic EPS. B. Diluted EPS. C. Both a and b. D. None of these is correct.

B. Diluted EPS.

When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the: A. Treasury stock method. B. If converted method. C. Optional method. D. Dilution method.

B. If converted method.

The compensation associated with a share of restricted stock under a stock award plan is: A. The market price of a share of similar fixed income securities. B. The market price of an unrestricted share of the same stock. C. The book value of an unrestricted share of the same stock. D. The book value of a share of similar stock.

B. The market price of an unrestricted share of the same stock.

Which of the following statements is true regarding share appreciation rights (SAR) payable in cash? A. Any change in estimated total compensation is recorded as a prior adjustment. B. The total amount of compensation is not known for certain until the date the SAR is exercised. C. The liability is adjusted only to reflect each additional year of service. D. None of these is correct.

B. The total amount of compensation is not known for certain until the date the SAR is exercised.

Executive stock options should be reported as compensation expense: A. Using the intrinsic value method. B. Using the fair value method. C. Using either the fair value method or the intrinsic value method. D. Only on rare occasions.

B. Using the fair value method.

Under IFRS, a deferred tax asset for stock options A. is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense. B. is the portion of the options' intrinsic value earned to date times the tax rate. C. is the tax rate times the amount of compensation. D. isn't created if the award is "in the money;" that is, it has intrinsic value

B. is the portion of the options' intrinsic value earned to date times the tax rate.

The compensation associated with executive stock option plans is A. the book value of a share of the company's shares times the number of options B. the estimated fair value of the options C. allocated to expense over the number of years until expiration D. recorded as compensation expense on the date of grant

B. the estimated fair value of the options

How many types of potential common shares must a corporation have in order to be said to have a complex capital structure? A. 3. B. 2. C. 1. D. 0.

C. 1.

When calculating diluted earnings per share, stock options: A. Are included if they are anti-dilutive. B. Should be ignored. C. Are included if they are dilutive. D. Increase the numerator while not affecting the denominator.

C. Are included if they are dilutive.

If a stock split occurred, when calculating the current year's EPS, the shares are treated as issued: A. At the end of the year. B. On the first day of the next fiscal year. C. At the beginning of the year. D. On the date of distribution.

C. At the beginning of the year.

The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to: A. Buy common stock as an investment. B. Retire preferred stock. C. Buy treasury stock. D. Increase net income.

C. Buy treasury stock.

When a company's only potential common shares are convertible bonds: A. Diluted EPS will be greater if the bonds are actually converted than if they are not converted. B. Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted. C. Diluted EPS will be the same whether or not the bonds are converted. D. The effect of conversion on diluted EPS cannot be determined without additional information.

C. Diluted EPS will be the same whether or not the bonds are converted.

Which of the following is a correct statement concerning earnings per share? A. Earnings per share can never be a negative number. B. Earnings per share must be reported for all corporations. C. If a company has an extraordinary loss, at least two EPS amounts must be reported. D. Reported earnings per share is the result of dividing weighted-average shares by net income.

C. If a company has an extraordinary loss, at least two EPS amounts must be reported.

A simple capital structure might include: A. Stock rights. B. Convertible bonds. C. Nonconvertible preferred stock. D. Stock purchase warrants

C. Nonconvertible preferred stock.

Which of the following results in increasing basic earnings per share? A. Paying more than carrying value to retire outstanding bonds. B. Issuing cumulative preferred stock. C. Purchasing treasury stock. D. All of these increase basic earnings per share.

C. Purchasing treasury stock.

If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of the bond discount: A. Will have no effect. B. Will decrease the numerator. C. Will increase the numerator. D. May increase or decrease the numerator, depending on the amortization method used.

C. Will increase the numerator.

The compensation associated with restricted stock under a stock award plan is: A. the book value of an unrestricted share of the same stock times the number of shares. B. the estimated fair value of a share of similar stock times the number of shares. C. allocated to expense over the service period which usually is the vesting period. D. the book value of a share of similar stock times the number of shares.

C. allocated to expense over the service period which usually is the vesting period.

When recognizing compensation under a stock option plan, unanticipated forfeitures are treated as: A. A change in accounting principle. B. A loss. C. An income item. D. A change in estimate.

D. A change in estimate.

The result of a stock split is: A. A larger number of more valuable shares. B. An increase in corporate assets. C. An increase in shareholders' equity. D. A larger number of less valuable shares.

D. A larger number of less valuable shares.

Stock options do not affect the calculation of: A. Diluted EPS. B. Weighted-average common shares. C. The denominator in the diluted EPS fraction. D. Basic EPS.

D. Basic EPS.

Preferred dividends are subtracted from earnings when computing earnings per share whether or not the dividends are declared or paid if the preferred stock is: A. Callable. B. Convertible. C. Participating. D. Cumulative

D. Cumulative

The single accounting number in the annual report that receives the most attention by investors is: A. Total revenue. B. Book value per share. C. Equity per share. D. Earnings per share.

D. Earnings per share.

ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend: A. Will be added to the numerator of the earnings per share fraction for the current year. B. Will be added to the denominator of the earnings per share fraction for the current year. C. Will be subtracted from the numerator of the earnings per share fraction for the current year. D. Has no effect on the earnings per share for the coming year.

D. Has no effect on the earnings per share for the coming year.

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market? A. Decrease. B. No effect if the shares are held as treasury shares. C. Increase only if the shares are considered to be retired. D. Increase.

D. Increase.

When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the: A. Highest incremental effect. B. Higher numerator. C. Median incremental effect. D. Lowest incremental effect.

D. Lowest incremental effect.

XYZ paid $10,000 in dividends in January of the current year to its preferred shareholders. The preferred stock is nonconvertible and noncumulative. The dividend: A. Will be added to the denominator of the earnings per share fraction for the current year. B. Will be added to the numerator of the earnings per share fraction for the current year. C. Will be subtracted from the numerator of the earnings per share fraction for the current year. D. May not affect earnings per share depending on the declaration date.

D. May not affect earnings per share depending on the declaration date.

Nonconvertible bonds affect the calculation of: A. Basic earnings per share. B. Diluted earnings per share. C. Both a and b. D. None of these is correct.

D. None of these is correct.

Basic and diluted earnings per share data are required to be reported: A. In footnotes to the financial statements. B. Only if they add to the relevance of the income statement. C. In the summary section of the annual report. D. On the face of the income statement.

D. On the face of the income statement.

Which of the following is not a potential common stock? A. Convertible preferred stock. B. Convertible bonds. C. Stock rights. D. Participating preferred stock.

D. Participating preferred stock.

When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the: A. Optional method. B. If converted method. C. Dilution method. D. Treasury stock method.

D. Treasury stock method.

Basic earnings per share is computed using: A. The actual number of common shares outstanding at the end of the year. B. A weighted-average of preferred and common shares. C. The number of common shares outstanding plus common stock equivalents. D. Weighted-average common shares outstanding for the year.

D. Weighted-average common shares outstanding for the year.