ch 19
Diluted EPS should be calculated using different combinations of potential common shares to find the combination that yields the: lowest possible EPS. highest possible EPS. average EPS.
a
For the purpose of deriving EPS, securities are considered dilutive if they are capable of reducing earnings per share. reducing the amount of dividends per share. reducing the number of outstanding shares. increasing the company's debt to equity ratio.
a
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 antidilutive. neither dilutive nor antidilutive. dilutive.
a
In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include cash received at exercise total compensation expense from the stock option award par value of the common shares issued
a
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 outstanding. period that they are not outstanding. entire fiscal period.
b
Fuller Corp. has 10,000 options outstanding that allow employees to purchase each share of stock for $10. The market price of the stock is $14. The intrinsic value of the related options is $14 per share. $10 per share. $4 per share.
c
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
c
Which of the following factors (each considered independently) will tend to increase the value of stock options? (Select all that apply.) a longer option term increases in the market price of the underlying stock volatility of the stock price a higher exercise price higher dividends
a,b,c
The "if converted method" assumes that convertible securities were converted into common stock at what point? the end of the current period never the beginning of the current period
c
Which of the following strategies will simplify the determination of whether convertible securities are dilutive or antidilutive to EPS? Assume all convertible securities are dilutive. Calculating EPS, including each possible combination of convertible securities. Comparing the incremental effect of the conversion.
c
Which of the following are common types of restricted stock plans? (Select all that apply.) Restricted stock debentures Restricted stock rights Restricted stock units Restricted stock awards
c,d
Cliff Vesting
Requires participants to complete a specific number of years of service with an employer before they get any vested benefits, after which they are 100% vested. (vest all at once)
Vested restricted stock awards are (Select all that apply.) already outstanding. included in the denominator of basic EPS. added in the denominator for the purpose of calculating diluted EPS only.
a,b
Which of the following represent typical goals of executive compensation plans? (Select all that apply.) To provide compensation to certain employees. To create performance incentives for certain employees. To reduce reported net income. To significantly reduce corporate tax obligations.
a,b
Which of the following are facts or conditions that are specifically set forth in stock option plans? (Select all that apply.) The price at which option holders may purchase shares The time period during which option holders may purchase shares The maximum number of shares option holders may purchase The minimum number of shares option holders must purchase
a,b,c
Which of the following potential common shares may be included in the calculation of diluted EPS, but not basic EPS? Convertible securities Restricted stock Outstanding common shares Contingent issuable shares Stock options
a,b,d,e
Antidilutive securities are excluded from the calculation of EPS because they would not effect EPS. decrease EPS. increase EPS.
c
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
c
Employee share purchase plans typically allow ______ to purchase company shares at favorable terms. new employees only top executives only all employees
c
Compensation plans that are tied to the achievement of certain targets and are used to motivate key employees are referred to as _________ compensation plans.
management
intrinsic value
Benefit the holder would realize by exercising the option rather than buying the stock directly
On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. Utta should recognize the expiration by recording
DR paid-in capital—stock options for $6,000. CR paid-in capital—expired stock options for $6,000.
Volatility value
Likelihood that the option holder might benefit from price appreciation
Graded Vesting
System by which qualified retirement plan participants become incrementally vested over a period of years of service. (vest over time)
Contingent issuable shares may be included in the calculation of diluted EPS. both basic and diluted EPS. basic EPS.
a
True or false: Stock options have become an integral part of most medium and large companies. True False
a
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.
a
Which of the following shares may be included in the calculation of basic EPS? Outstanding common shares Stock options Contingent issuable shares Restricted stock Convertible securities
a
Which of the following statements regarding the prevalence of stock option awards is correct? Many large and medium-size companies grant stock options. All large companies grant stock options. Stock options are unique to large multinational companies. All public companies grant stock options.
a
On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting (Select all that apply.) paid-in capital in excess of par for $225,000. paid-in capital from stock options for $171,000. common stock for $9,000. common stock for $180,000.
a,c
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
a,c
Which of the following factors (each considered independently) will tend to lower the value of stock options? (Select all that apply.) higher dividends volatility of the stock price a longer option term a higher exercise price increases in the market price of the underlying stock
a,d
Securities that upon conversion or exercise of potential common shares would increase EPS are referred to _____________ as securities.
antidilutive
A single number that summarizes a company's performance and to which investors pay reasonable attention is the: income statement. earnings per share. dividends. retained earnings.
b
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 160,000 shares. 145,000 shares. 180,000 shares.
b
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.
b
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 step vesting. graded vesting. cliff vesting.
b
On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. Utta should recognize the expiration by debiting common stock for $9,000. paid-in capital—stock options for $6,000. loss on stock options for $6,000. cash for $6,000.
b
On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. When the options expire, Utta should credit cash for $6,000. paid-in capital—expired stock options for $6,000. common stock for $1,000. gain on stock options for $6,000.
b
Salt Company reports net income of $360 million for 2017; 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. 262 million. 308 million. [(og shares outstanding + [add. shares x months left]) x (1+ stock div.)] - 24/12
b
Securities that may become common shares in the future are considered outstanding shares. potential common shares. treasury shares.
b
Total compensation associated with restricted stock awards typically is equal to the shares' market value at time of the removal of the restriction. market price at grant date of the award. par value.
b
Warrants, options, and rights are dilutive if the exercise price is 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' end-of-year market price.
b
Which of the following are subtracted when determining earnings available to common shareholders? interest expense preferred stock dividends common stock dividends
b
Which of the following is correct regarding stock options and other share-based plans? They typically are awarded based on age at retirement. They frequently specify a performance or market condition. They typically are awarded based on the age of the company's employees.
b
Which of the following scenarios will increase stockholders' equity? Stock dividends The sale of new shares A 2-for-1 stock split
b
An actual conversion of dilutive convertible securities will (Select all that apply.) decrease the reported amount of diluted EPS. not affect the reported amount of diluted EPS. decrease the reported amount of basic EPS. increase the reported amount of diluted EPS.
b,c
The two components of the time value relating to options are the opportunity cost involved in holding stock options. effect of the time value of money. volatility value.
b,c
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 in excess of par. debit paid-in capital—restricted stock. credit paid-in capital—restricted stock. credit common stock.
b,c,e
On January 2, 20X1, 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 20X4, 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 in excess of par for $171,000. paid-in capital—stock options for $54,000. loss on stock options for 9,000. cash for $180,000.
b,d
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 executive plans. performance-based plans. managerial plans. market-based plans.
b,d
Place the presentation of earnings per share in the correct order. EPS - net income EPS - income from continuing operations EPS - discontinued operations
bca
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. issue treasury shares. purchase treasury shares. retire treasury shares.
c
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. Meeting the target performance level is already complete/met
c
Which of the following accounting numbers is reported most frequently by the media? total assets total revenues earnings per share net income
c
Which of the following statements is correct regarding stock dividends and stock splits? They represent distributions of additional shares to prior shareholders. They represent distributions of additional shares to new shareholders. They represent distributions of additional shares to existing shareholders.
c
Which of the following are the essential components of option values? (Select all that apply.) net realizable value market value time value intrinsic value
c,d
Stock appreciation rights may be payable _________ in _____________ or .
cash; shares
In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to ___________ shareholders. (Only one word per blank.)
common
If convertible bonds are assumed to have been converted, the numerator would be assumed to ____ by the ______ effect of the interest saved. decrease; after-tax decrease; before-tax increase; before-tax increase; after-tax
d
Which of the following would prevent Norbert Company from having a simple capital structure for the purpose of reporting EPS? stock dividends nonconvertible preferred stocks cash dividends convertible preferred stocks nonconvertible bonds
d
A strategy that simplifies the determination of whether convertible securities are dilutive is to compare their ___________ effect on earnings per share.
incremental
The benefit the holder of an option would realize by exercising the option rather than buying the underlying stock directly is referred to as _______ value.
intrinsic
Option values include the following essential components: a(n) __________ value and a(n) __________ value.
intrinsic; time
The way we take into account the dilutive effect of stock options is referred to as the ___________ stock method.
treasury
Which of the following can be used to satisfy SARs awards? (Select all that apply.) Shares Inventory Cash Receivables
a,c
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—income from continuing operations EPS—discontinued operations
a,c,d
Stock options give employees the choice to purchase ________ during a specific time period. an unlimited number of shares of the firm's stock at a price determined by future conditions a specified number of shares of the firm's stock at a price determined by future conditions a specified number of shares of the firm's stock at a specified price an unlimited number of shares of the firm's stock at a specified price
c
Which of the following may result in potential common shares? (Select all that apply.) nonconvertible bonds nonconvertible preferred stocks convertible preferred stocks convertible bonds common stocks authorized
c,d
On January 2, 20X1, 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 20X4, when the market value of the stock is $30 per share, 9,000 stock options were exercised. Utta Corp. should recognize this event by recording (Select all that apply.)
DR cash for $180,000. DR paid-in capital—stock options for $54,000. CR paid-in capital in excess of par for $225,000. CR common stock for $9,000
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.
a
Plans that permit all employees to buy shares directly from their company at favorable prices are referred to as employee share purchase plans. employee bonus share plans. employee stock options.
a
Restricted stock awards are included in the calculation of EPS if unvested. excluded from the calculation of EPS. included in the calculation of EPS if vested.
a
Proceeds under the treasury stock method may include (Select all that apply.) total compensation from nonvested awards. tax benefits derived from nonqualified stock options. the current market value of the stocks assumed to have been acquired with the options. amounts received under the hypothetical exercising of the options.
a,d
Pfeffer Company reports net income of $360 million for 20X1; 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 320,000. 240,000. 250,000. Reason: [og shares + (add. shares x months left in yr)]
c
Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as stock options. defined benefit pension plans. restricted stock plans. stock appreciation rights.
c
