Question

You have been provided with accounting research tools. Use them to answer the following multiple choice questions. After you make your choice, tell me what theory you are basing your answer on, or what part of the codification applies to the question. As you may have guessed, this is an open book quiz.

[1] GAAP applying to earnings per share require

a. Restatement of EPS data of a prior period if the earnings of the prior period have been restated.

b. Dual presentation of BEPS and DEPS for the current period only.

c. The presentation of BEPS but not DEPS for the results of operations of prior periods presented in the financial statements.

d. The disclosure of the effect of a restatement of prior-period earnings in the prior period.

[3] Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

a. The current-year dividends and the dividends in arrears on the cumulative preferred stock should be added to the net loss, but the dividends on the noncumulative preferred stock should not be included in the calculation.

b. The dividends on the noncumulative preferred stock should be added to the net loss, but the current-year dividends and the dividends in arrears on the cumulative preferred stock should not be included in the calculation.

c. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss.

d. Neither the dividends on the noncumulative preferred stock nor the current-year dividends and the dividends in arrears on cumulative preferred stock should be included in the calculation.

In determining diluted earnings per share (DEPS),

a. Potential common stock with a dilutive effect on EPS is not considered in the computation of shares outstanding.

b. The denominator is adjusted for the assumed exercise of outstanding stock options during the period if the exercise would have a dilutive effect on EPS.

c. Under the treasury stock method, DEPS data are computed as if the options and warrants were exercised at the end of the period and the funds obtained were used to purchase common stock at the average market price in effect for the period.

d. Dividends on preferred stock convertible to common stock are subtracted from net income in the numerator.

Answer 1

GAAP applying to earnings per share require

a. Restatement of EPS data of a prior period if the earnings of the prior period have been restated. As per IAS 33 and GAAP , if there is any chang in the net profit due to an prior period adjustment, the EPS must be reinstated to include the adjustments of such priot period item

Wood Co.’s dividends on noncumulative preferred stock have been declared but not paid. Wood has not declared or paid dividends on its cumulative preferred stock in the current or the prior year and has reported a net loss in the current year. For the purpose of computing basic earnings per share, how should the income available to common stockholders be calculated?

c. The dividends on the noncumulative preferred stock and the current-year dividends on the cumulative preferred stock should be added to the net loss. Income avaiable to common share holders is calculated by deducting dividends declared in the period of noncumulative preferred stock irrespective if they are paid and dividends on cumilative preferred stock irrespective if its declared

In determining diluted earnings per share (DEPS),

b. The denominator is adjusted for the assumed exercise of outstanding stock options during the period if the exercise would have a dilutive effect on EPS.

DEPS Formula = (Net income - Preferred Dividend)/ ( basic shares + conversions of any debts warrants, bonds , debentures or any other dilutions) These dilutions may occur in the future but their effect will be calculated in the current period as well , It Assumes as if the dilution rights have been excersied and the securites are converted into shares