ch 19

Securities that upon conversion or exercise of potential common shares would increase EPS are referred to as _____ securities.

antidilutive

In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include par value of the common shares issued total compensation expense from the stock option award cash received at exercise

cash received at exercise

Pfeffer Company reports net income of $360 million for the year; the company's tax rate is 40%. At the beginning of the year, 200,000 common shares were outstanding. On August 1, the company issued an additional 120,000 shares. Weighted-average shares will be 250,000. 240,000. 320,000.

250,000. [200,000 + (120,000 x 5/12)]

Which of the following potential common shares may be included in the calculation of diluted EPS, but not basic EPS? Restricted stock Convertible securities Stock options Contingent issuable shares Outstanding common shares

Restricted stock Convertible securities Stock options Contingent issuable shares

Which of the following are common types of restricted stock plans? (Select all that apply.) Restricted stock awards Restricted stock units Restricted stock debentures Restricted stock rights

Restricted stock awards Restricted stock units

Which of the following is correct regarding stock options and other share-based plans? They frequently specify a performance or market condition. They typically are awarded based on age at retirement. They typically are awarded based on the age of the company's employees.

They frequently specify a performance or market condition.

Warrants, options, and rights are antidilutive if the exercise price is higher than the stocks' end-of-year market price. lower than the stocks' average market price. lower than the stocks' end-of-year market price. higher than the stocks' average market price.

higher than the stocks' average market price.

Falken Company awards 1,000 shares of common stock to Robert Small. The shares are restricted and require that Robert remains with the company for at least 2 more years. The current market price of the shares is $15 per share. Total compensation associated with this restricted stock award is $15,000. $0. $7,500.

$15,000.

Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at face. Each bond is convertible into 14 shares of common stock. The company's tax rate is 30%. What would be the effect of the assumed conversion on the numerator of diluted EPS? $30,000 $60,000 $21,000

$21,000 $1,000 x 500 x 6% x (1 - 0.3)

Place the presentation of earnings per share in the correct order.

1) EPS - income from continuing operations 2) EPS - discontinued operations 3) EPS - net income

At the beginning of the year, Solen Corp. had 100,000 shares of common stock outstanding. On April 1, the company issued an additional 60,000 shares. Weighted-average shares for the year will be 145,000 shares. 180,000 shares. 160,000 shares.

145,000 shares. 100,000 + (60,000 x 9/12)

Salt Company reports net income of $360 million for the year; the company's tax rate is 40%. At the beginning of the year, 200 million common shares were outstanding. On July 1, Salt sold an additional 80 million shares and on October 1 distributed a 10% stock dividend. On December 1, the company reacquired 24 million of its outstanding shares. The company's weighted-average shares for the purpose of calculating basic EPS will be 256 million. 308 million. 262 million.

262 million. [(200 + [80 x 6/12]) x 1.1] - 24/12

Vogel Corp.'s denominator for calculating diluted EPS is 57,300 weighted-average shares. Included in the denominator were 5,000 shares related to convertible preferred stocks assumed to have been converted. If the convertible preferred stock had actually been converted, the weighted-average shares for purposes of diluted EPS would have been 57,300 shares. 62,300 shares. 52,300 shares.

57,300 shares.

Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at face. Each bond is convertible into 14 shares of common stock. The company's tax rate is 30%. What would be the effect of the assumed conversion on the denominator of diluted EPS? 4,900 shares would be subtracted. 7,000 shares would be subtracted. 4,900 shares would be added. 7,000 shares would be added.

7,000 shares would be added. 500 x 14

Which of the following will qualify a company for having a simple capital structure for the purpose of earnings per share? A company that has no complex earning-related transactions. A company that is not traded on the major stock exchanges. A company that has no outstanding securities that could potentially dilute EPS.

A company that has no outstanding securities that could potentially dilute EPS.

Which of the following are likely advantages of employee share purchase plans for employees? (Select all that apply.) A discount on the purchase price of the shares. Shares that promise special privileges. The absence of brokerage fees to purchase the shares.

A discount on the purchase price of the shares. The absence of brokerage fees to purchase the shares.

Which of the following strategies will simplify the determination of whether convertible securities are dilutive or antidilutive to EPS? Calculating EPS, including each possible combination of convertible securities. Comparing the incremental effect of the conversion. Assume all convertible securities are dilutive.

Comparing the incremental effect of the conversion.

Which of the following must be presented in a company's financial statements (which include the financial statement notes), assuming that the related financial statement items exist for that company? (Select all that apply.) EPS—net income EPS—operating income EPS—discontinued operations EPS—income from continuing operations

EPS—net income EPS—discontinued operations EPS—income from continuing operations

In calculating diluted EPS,convertible preferred stock is assumed converted only if the stock was issued during an earlier period. True False

False

Graded vesting Cliff vesting

Graded vesting Stock options vest over time. Cliff vesting Stock options vest all at once.

Which of the following is a likely advantage of employee share purchase plans for employers? Higher stock prices immediately after the purchase. Increased employee loyalty to the company. Enhanced earning per share for the purchase year.

Increased employee loyalty to the company.

Which of the following statements regarding the prevalence of stock option awards is correct? All public companies grant stock options. Stock options are unique to large multinational companies. All large companies grant stock options. Many large and medium-size companies grant stock options.

Many large and medium-size companies grant stock options.

Which of the following shares may be included in the calculation of basic EPS? Contingent issuable shares Outstanding common shares Convertible securities Stock options Restricted stock

Outstanding common shares

Which of the following plans frequently specify a performance condition or a market condition that must be satisfied before employees are allowed the benefits of the reward? (Select all that apply.) Defined benefit pension plans Defined contribution pension plans Stock option plans Other share-based plans

Stock option plans Other share-based plans

What factors would affect the calculation of diluted EPS if convertible bonds are assumed to have been converted into common stock of the issuing company? (Select all that apply.) The numerator would reflect the pretax savings of interest. The numerator would reflect the after-tax savings of interest. The denominator would reflect the number of bonds assumed converted. The denominator would reflect the additional common shares assumed issued.

The numerator would reflect the after-tax savings of interest. The denominator would reflect the additional common shares assumed issued.

What condition must be met to include contingent issuable shares in the calculation of diluted EPS? Meeting the required condition is estimated to be probable. Meeting the required condition is at least possible. The required condition already is being met.

The required condition already is being met.

Which of the following scenarios will increase stockholders' equity? The sale of new shares A 2-for-1 stock split Stock dividends

The sale of new shares

Which of the following is correct regarding the nature of restricted stock? The shares can only be traded during certain time periods. The shares can only be sold back to the issuing company and not outside investors. The shares typically are contingent on the continued employment of the awardee.

The shares typically are contingent on the continued employment of the awardee.

Which of the following statements is correct regarding stock dividends and stock splits? They represent distributions of additional shares to new shareholders. They represent distributions of additional shares to prior shareholders. They represent distributions of additional shares to existing shareholders.

They represent distributions of additional shares to existing shareholders.

Which of the following represent typical goals of executive compensation plans? (Select all that apply.) To create performance incentives for certain employees. To reduce reported net income. To significantly reduce corporate tax obligations. To provide compensation to certain employees.

To create performance incentives for certain employees. To provide compensation to certain employees.

Stock options have become an integral part of most medium and large companies. True False

True

Employee share purchase plans typically allow ______ to purchase company shares at favorable terms. new employees only all employees top executives only

all employees

Horst Company has 50,000 stock options outstanding. The option exercise price is $13 per share, the average market price of the stock was $12 per share during the year, and the end-of-year stock price was $14. For the purpose of calculating EPS, these stock options are neither dilutive nor antidilutive. antidilutive. dilutive.

antidilutive.

For the purpose of calculating diluted EPS, convertible preferred stock is assumed to be converted in the following year. assumed to have already been converted. ignored.

assumed to have already been converted.

In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to _____ shareholders.

common

Which of the following would prevent Norbert Company from having a simple capital structure for the purpose of reporting EPS? stock dividends convertible preferred stocks cash dividends nonconvertible preferred stocks nonconvertible bonds

convertible preferred stocks

Marian Company granted restricted stock units for its par value stock to its top executives. When the restriction is lifted, Marian should (Select all that apply.) debit paid-in capital in excess of par. credit paid-in capital—restricted stock. credit paid-in capital in excess of par. credit common stock. debit paid-in capital—restricted stock.

credit paid-in capital in excess of par. credit common stock. debit paid-in capital—restricted stock.

The effect of changes in estimated option forfeitures must be recognized retroactively by restating financial statements. equally over the remaining vesting period. cumulatively in the year the estimate changes.

cumulatively in the year the estimate changes.

An actual conversion of dilutive convertible securities will (Select all that apply.) decrease the reported amount of basic EPS. increase the reported amount of diluted EPS. not affect the reported amount of diluted EPS. decrease the reported amount of diluted EPS.

decrease the reported amount of basic EPS. not affect the reported amount of diluted EPS.

Contingent issuable shares may be included in the calculation of basic EPS. both basic and diluted EPS. diluted EPS.

diluted EPS.

Which of the following accounting numbers is reported most frequently by the media? net income total assets earnings per share total revenues

earnings per share

Investors' desire to focus on one number that may summarize a company's performance may explain the importance of the income statement. earnings per share. dividends. retained earnings.

earnings per share.

Compensation plans that are tied to the achievement of certain targets and are used to motivate key employees are referred to as _____ compensation plans.

executive, management, manager, or performance

Falcon Company grants stock options to its upper and middle management employees. The options vest over a 4-year period, with 25% exercisable after 1 year, 25% after 2 years, another 25% after 3 years, and the remaining 25% after 4 years. This is an example of cliff vesting. graded vesting. step vesting.

graded vesting.

The goal of diluted EPS is to report the ______ potential dilution that might result from the conversion or exercise of securities and equity contracts. average lowest highest

highest

The method that assumes that a conversion into common stock occurred at the later of the beginning of the period or the time the convertible security is issued is referred to as the Blank______ method. conversion dilution if converted multiple conversion

if converted

When estimates of options forfeitures change, the cumulative effect on compensation is recognized in current earnings. in retained earnings over the remaining vesting period.

in current earnings.

Restricted stock awards are included in the calculation of EPS if vested. included in the calculation of EPS if unvested. excluded from the calculation of EPS.

included in the calculation of EPS if unvested.

Vested restricted stock awards are (Select all that apply.) included in the denominator of basic EPS. added in the denominator for the purpose of calculating diluted EPS only. already outstanding.

included in the denominator of basic EPS. already outstanding.

A strategy that simplifies the determination of whether convertible securities are dilutive is to compare their _____ effect on earnings per share.

incremental

Warrants, options, and rights are dilutive if the exercise price is higher than the stocks' end-of-year market price. lower than the stocks' average market price. higher than the stocks' average market price. lower than the stocks' end-of-year market price.

lower than the stocks' average market price.

Warrants, options, and rights are dilutive if the exercise price is lower than the stocks' end-of-year market price. higher than the stocks' average market price. lower than the stocks' average market price. higher than the stocks' end-of-year market price.

lower than the stocks' average market price.

Diluted EPS should be the average EPS. highest possible EPS. lowest possible EPS.

lowest possible EPS.

Total compensation associated with restricted stock awards typically is equal to the shares' market price at grant date of the award. par value. market value at time of the removal of the restriction.

market price at grant date of the award.

When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.) paid-in capital - excess of par compensation expense common stock

paid-in capital - excess of par common stock

On January 1, Year 1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. On the date of grant, the estimated value of the options is $6 per option. During Year 4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting (Select all that apply.) common stock for $180,000. paid-in capital in excess of par for $225,000. paid-in capital from stock options for $171,000. common stock for $9,000.

paid-in capital in excess of par for $225,000. common stock for $9,000. $180,000 + $54,000 - $9,000 $1 x 9,000 shares

On January 1, Year 1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During Year 4, 9,000 stock options were exercised. In Year 5, the remaining stock options expire. When the options expire, Utta should credit gain on stock options for $6,000. cash for $6,000. common stock for $1,000. paid-in capital—expired stock options for $6,000.

paid-in capital—expired stock options for $6,000. 1,000 x $6

On January 1, Year 1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. On the date of grant, the estimated value of the options is $6 per option. During Year 4, when the market value of the stock is $30 per share, 9,000 stock options were exercised. Utta Corp. should recognize this event by debiting (Select all that apply.) paid-in capital—stock options for $54,000. cash for $180,000. loss on stock options for 9,000. paid-in capital in excess of par for $171,000.

paid-in capital—stock options for $54,000. cash for $180,000. 9,000 x $6

On January 1, Year 1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During Year 4, 9,000 stock options were exercised. In Year 5, the remaining stock options expire. Utta should recognize the expiration by debiting loss on stock options for $6,000. common stock for $9,000. cash for $6,000. paid-in capital—stock options for $6,000.

paid-in capital—stock options for $6,000.

Share-based plans typically are grouped into two major categories based on the conditions that must be met by employees in order to receive the benefits of the award. These categories are performance-based plans. managerial plans. executive plans. market-based plans.

performance-based plans. market-based plans.

When a company reacquires its own shares, and weighted-average shares are calculated for the purpose of determining EPS, the reacquired shares that are subtracted from the weighted-average calculation are weighted for the period that they are not outstanding. period that they are outstanding. entire fiscal period.

period that they are not outstanding.

Securities that may become common shares in the future are considered potential common shares. treasury shares. outstanding shares.

potential common shares.

Which of the following are subtracted when determining earnings available to common shareholders? preferred stock dividends common stock dividends interest expense

preferred stock dividends

The treasury stock method takes into account the dilutive effect of stock options and assumes that the proceeds from the exercise of options are used to sell treasury shares. retire treasury shares. purchase treasury shares. issue treasury shares.

purchase treasury shares.

Compensation relating to stock option grants should be ignored permanently if the current market price of the stock does not exceed the exercise price. ignored until the grants are exercised. recognized over the service period for which employees receive options.

recognized over the service period for which employees receive options.

For the purpose of deriving EPS, securities are considered dilutive if they are capable of reducing the amount of dividends per share. increasing the company's debt to equity ratio. reducing the number of outstanding shares. reducing earnings per share.

reducing earnings per share.

Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as defined benefit pension plans. stock options. restricted stock plans. stock appreciation rights.

restricted stock plans.

Earnings per share is reported very frequently in the financial press because it is easy to calculate. tends to fluctuate less than net income. tends to fluctuate more than net income. tends to summarize the company's performance.

tends to summarize the company's performance.

The "if converted method" assumes that convertible securities were converted into common stock at what point? the beginning of the current period the end of the current period never

the beginning of the current period

Donald Company grants stock options to certain employees. On the date of grant, Donald should measure total compensation based on par value of the stocks to be issued under the grant. the fair value of the options. the difference between the option exercise price and the current market price.

the fair value of the options.

Proceeds under the treasury stock method may include (Select all that apply.) tax benefits derived from nonqualified stock options. total compensation from nonvested awards. the current market value of the stocks assumed to have been acquired with the options. amounts received under the hypothetical exercising of the options.

total compensation from nonvested awards. amounts received under the hypothetical exercising of the options.

The way we take into account the dilutive effect of stock options is referred to as the ______ stock method.

treasury

In calculating diluted EPS, which of the following restricted stock awards is included in the calculation? vested restricted stock awards only unvested restricted stock awards only all restricted stock awards

unvested restricted stock awards only

Which of the following statements regarding the role of antidilutive securities in the calculation of EPS is correct? They are included in the calculation of both basic and diluted EPS. They are ignored when calculating both basic and diluted EPS. They are included in the calculation of diluted EPS only. They are included in the calculation of basic EPS only.

They are ignored when calculating both basic and diluted EPS.

Which of the following may result in potential common shares? (Select all that apply.) convertible preferred stocks nonconvertible bonds nonconvertible preferred stocks common stocks authorized convertible bonds

convertible preferred stocks convertible bonds