Q&A Hero

Q: Which of the following statements does not accurately reflect the financial accounting for compensatory stock option plans? A. Compensation expensed is allocated equally over the service (vesting) period. B. The compensation expense is not adjusted for changes in the market value of the stock options during the service (vesting) period. C. The paid-in capital stock options account is credited when compensation expense is recorded each year. D. Total owners' equity is increased by the par value of the common stock issued when the options are converted.

Q: Analysts should expect to see stock option information in A. the auditor's report. B. a note to the financial statements. C. a separate report to the SEC. D. a separate report to shareholders.

Q: Over the vesting period for employee stock options, current GAAP requires that the entire compensation expense be recognized A. in the first year of the vesting period. B. in the last year of the vesting period. C. equally in each year of the vesting period. D. only if the options are exercised.

Q: Current GAAP specifies that the compensation costs for stock options are measured A. at the grant date only. B. at the grant date and again at the vesting date. C. at the vesting date only. D. at the grant date and again at the exercise date.

Q: According to current GAAP, the date when the terms for stock options are mutually agreed-upon and the stock options are awarded to employees is the A. vesting date. B. grant date. C. exercise date. D. payment date.

Q: Stock options are granted to the employees of Young Company on March 10, 2010. The employees must wait until March 10, 2014 to exercise the options. The four-year waiting period is the A. expected life of the options. B. grant period. C. vesting period. D. holding period

Q: SFAS No. 123 was issued as a compromise to the FASB's original position regarding stock options as it A. required companies to continue following the approach used in APB No. 25. B. required companies to measure the fair value of stock options and charge this to expense. C. allowed companies to choose either the APB No. 25 approach or expense the fair value of the options. D. abandoned any reference to recognition of expense for options.

Q: An argument raised by opponents to the FASB's proposal that employee stock options should be recognized as an expense was that it could A. violate the historical cost principle. B. violate the cost-benefit rule. C. violate materiality concepts. D. jeopardize compliance with contract terms and conditions.

Q: Which of the following arguments wasn't used to support the continuation of the accounting for stock-based compensation plans as allowed under APB Opinion No. 25? A. Stock options do not involve a cash flow, therefore the recording of an expense would violate appropriate income measurement. B. The Black-Scholes method of valuing stock options has not been widely accepted and is arbitrary. C. The fair value approach could jeopardize compliance with contract terms and conditions. D. The fair value approach would increase expenses and lower net income which would result in lower stock prices.

Q: What is the balance in paid-in capital-stock options as of December 31, 2012 assuming that the fair value approach is used? A. $0 B. $25,000 C. $50,000 D. $100,000

Q: How much compensation expense will be recorded for the year ending December 31, 2013 using the fair value approach? A. $75,000 B. $175,000 C. $50,000 D. $25,000

Q: The exercise price for stock option plans on the grant date is A. always higher than the market price of the underlying shares. B. always lower than the market price of the underlying shares. C. usually lower than the market price of the underlying shares. D. usually equal to or higher than the market price of the underlying shares.

Q: The following information has been provided to you by the Rae Corporation for the year ending December 31, 2011: Net income was $979,000. Cash dividends totaling $120,000 were paid to the common shareholders. 6% convertible bonds with a par value of $2,000,000 were issued on February 1, 2011. The corporation's marginal income tax rate is 40%. 6% convertible preferred stock with a par value of $800,000 was outstanding during the entire year. Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should be used in the calculation of basic earnings per share and diluted earnings per share? A. Option a B. Option b C. Option c D. Option d

Q: The following information has been provided to you by the Smith Corporation for the year ending December 31, 2011: The numerator used in the calculation of basic earnings per share was $797,000. Cash dividends were paid to the common shareholders. 8% convertible bonds with a par value of $1,000,000 were issued on July 1, 2011. The corporation's marginal income tax rate is 40%. 6% convertible preferred stock with a par value of $800,000 were outstanding during the entire year. Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should be used in the calculation of diluted earnings per share? A. $893,000 B. $869,000 C. $773,000 D. $821,000

Q: The following information has been obtained from the Myers Corporation: 300,000 shares of common stock were outstanding on January 1, 2011. 50,000 stock options were outstanding on January 1, 2011; each option allows the holder to acquire one share of common stock for $20 per share. The average market price of the common stock during 2011 was $25 per share. 48,000 shares of common stock were issued on February 1, 2011. 18,000 shares of common stock were purchased on August 1, 2011. What is the weighted average number of shares to be used in the calculation of diluted earnings per share for 2011? A. 380,000 B. 326,500 C. 346,500 D. 386,500

Q: The following information has been obtained from the Mastic Corporation: 550,000 shares of common stock were outstanding on January 1, 2011. Bonds convertible into 50,000 shares of common stock were issued on July 1, 2011; the bonds have been determined to be dilutive. 36,000 shares of common stock were issued on November 1, 2011. 24,000 shares of common stock were purchased on December 1, 2011. What is the weighted average number of shares to be used in the calculation of diluted earnings per share for 2011? A. 612,000 B. 587,000 C. 604,000 D. 579,000

Q: The following information has been obtained from the Brewster Corporation: 250,000 shares of common stock were outstanding on January 1, 2011. 30,000 shares of preferred stock were issued on March 1, 2011. 12,000 shares of common stock were purchased on April 1, 2011. 10,000 shares of common stock were issued on October 1, 2011. What is the weighted average number of shares to be used in the calculation of basic earnings per share for 2011? A. 268,500 B. 243,500 C. 248,000 D. 278,000

Q: The following information has been obtained from the Massena Corporation: 100,000 shares of common stock were outstanding on January 1, 2011. 30,000 shares of common stock were issued on March 1, 2011. A 2 for 1 stock split was declared on April 1, 2011. The 2 for 1 stock split was distributed on May 1, 2011. 10,000 shares of common stock were purchased on October 1, 2011. What is the weighted average number of shares to be used in the calculation of basic earnings per share for 2011? A. 247,500 B. 216,250 C. 230,833 D. 209,167

Q: If each share of preferred stock is convertible into 2 shares of common stock, the diluted earnings per share for 2011 is A. $3.85 per share. B. $3.94 per share. C. $4.81 per share. D. $6.10 per share.

Q: The basic earnings per share for 2011 is (rounded) A. $3.50 per share. B. $3.94 per share. C. $4.81 per share. D. $6.10 per share.

Q: The weighted average number of common shares used to compute earnings per share for 2011 is A. 150,000. B. 160,000. C. 165,000. D. 180,000.

Q: The basic earnings per share for 2011 is A. $1.43 per share. B. $1.50 per share. C. $1.54 per share. D. $1.73 per share.

Q: A company that has earnings in Year 2 equal to the earnings of Year 1 can improve its Year 2 reported earnings per share by A. selling additional common stock. B. selling additional preferred stock. C. selling shares of treasury stock at a price exceeding what was paid for the treasury stock. D. purchasing shares of treasury stock.

Q: Earnings per share (EPS) data are prominent in corporate annual reports, but EPS suffers as a financial performance measure because EPS ignores the amount of A. revenue required to generate reported earnings. B. capital required to generate reported earnings. C. liabilities required to generate reported earnings. D. expenses required to generate reported earnings.

Q: Which of the following statements is correct when a company has a complex capital structure? A. Diluted earnings per share must be shown on the income statement. B. Diluted earnings per share and basic earnings per share must both be shown on the income statement. C. The company might have convertible bonds outstanding. D. The company must have participating preferred stock outstanding.

Q: Which of the following is not indicative of a complex capital structure? A. Outstanding convertible bonds. B. Outstanding convertible preferred stock. C. Outstanding cumulative preferred stock. D. Outstanding stock options.

Q: The denominator used in the calculation of basic earnings per share is the A. number of common shares outstanding at the end of the year. B. number of preferred shares outstanding at the end of the year. C. weighted average number of common shares outstanding during the year. D. weighted average number of common shares and preferred shares outstanding during the year.

Q: When a company does not have any convertible securities or options or warrants outstanding, the company has A. a complex capital structure. B. a simple capital structure. C. to report only diluted earnings per share. D. to report both basic and diluted EPS.

Q: A 3-for-1 stock split will reduce the per share par value and will A. decrease the number of shares proportionately. B. decrease earnings per share. C. increase owners' equity. D. increase the total par value of the common stock.

Q: By examining the statement of shareholders' equity an investor can determine all of the following except A. shares issued to employees for share-based compensation. B. unrealized losses on available-for-sale securities. C. the amount of convertible bonds issued during the year. D. dividends declared on common stock.

Q: On December 15, 2012 Ace Industries repurchased 200,000 shares of its common stock for $10 per share. Based on its shareholders' equity accounts, what can be inferred about this purchase? A. Ace is holding $2,000,000 of treasury stock which is being disclosed in the notes to the financial statements. B. Ace retired the shares by reducing the common stock and paid-in capital accounts. C. Ace is reporting the shares as a $2,000,000 investment on the asset side of the balance sheet. D. Not enough information is provided to determine how Ace recorded the purchase.

Q: Assuming that the preferred stock is cumulative, and that there are no dividends in arrears, what is the maximum dividend that may be distributed to common shareholders at December 31, 2012? A. $9,500,000 B. $7,000,000 C. $7,500,000 D. $2,000,000

Q: As a result of the passage of the 1984 Revised Model Business Corporation Act, it may be fair to state that A. the book value of owners' equity may not give an accurate picture of potentially legal distributions. B. the book value of owners' equity gives an accurate picture of potentially legal distributions. C. the book value of owners' equity never gives an accurate picture of potentially legal distributions. D. the book value of assets gives an accurate picture of potentially legal distributions.

Q: The 1984 Revised Model Business Corporation Act redefined solvency as a situation where the fair value of A. assets exceed the book value of liabilities after a distribution to shareholders. B. assets exceed the fair value of liabilities after a distribution to shareholders. C. liabilities exceed the fair value of assets. D. liabilities exceed the fair value of assets after a distribution to shareholders.

Q: When a publicly traded company issues both common stock and preferred stock, the SEC requires that A. preferred and common stock be combined in the equity section. B. preferred and common stock be clearly differentiated on the balance sheet. C. all preferred stock be shown as a liability. D. mandatorily redeemable preferred stock be shown as a liability.

Q: Which of the following statements pertaining to preferred stock is not correct? A. Preferred stock may have an adjustable rate which pays a dividend that is adjusted, usually on a quarterly basis. B. Preferred stock dividends are contractual obligations that must be paid in profitable years. C. Most preferred stock issues are nonparticipating, meaning that the shareholders are entitled to receive only dividends based on the stated dividend rate. D. Preferred shareholders are given preference with respect to both dividend distributions and in liquidation of the company.

Q: Mandatorily redeemable preferred stock is reported on the balance sheet as A. a liability. B. an equity item. C. a temporary investment. D. a separate line between liabilities and shareholders' equity.

Q: Companies with a history of net operating losses are prone to issue which one of the following to raise money? A. Debenture bonds B. Serial bonds C. Preferred stock D. Notes payable

Q: When a dividend is not declared on preferred stock, and the common shareholders cannot receive a dividend until all past and current dividends are paid to the preferred shareholders, the preferred stock is A. cumulative. B. noncumulative C. participating. D. nonparticipating.

Q: Which of the following is not a reason why a company would purchase its own stock? A. The company needs shares in order to meet employee stock option plans. B. The company's management may have concluded that the company's stock is undervalued at the prevailing market price. C. The company wants to increase its earnings per share. D. The company wants to manipulate its net income.

Q: What is the owners' equity balance on December 31, 2012? A. $8,663,350 B. $8,738,350 C. $8,865,850 D. $8,934,300

Q: What is the retained earnings balance on December 31, 2012? A. $1,994,050 B. $2,219,050 C. $2,214,300 D. $2,246,550

Q: Financial analysts should always review stock repurchase plans carefully because A. the plans always produce above-market returns. B. the plans usually produce above-market returns. C. it is important to determine the reasons for the buyback. D. the plans are always beneficial to the shareholders.

Q: Shareholders who sell back shares of the company stock as treasury stock are A. not taxed. B. taxed at ordinary rates. C. taxed at capital gains rates. D. subject to tax penalties.

Q: A corporation reported the following during 2012: Net income $175,250; a sale of 10,000 shares of $5 par value common stock for $8.75 per share; a purchase of treasury stock costing $24,750; a sale of treasury stock costing $15,500 for $14,695; a declaration and distribution of a $39,000 cash dividend; a declaration and distribution of a "small" stock dividend of 5,000 shares of $5 par value common stock at a total market value of $50,000. What was the increase in owners' equity during 2012? A. $213,695 B. $188,695 C. $198,195 D. $173,195

Q: Which one of the following is the correct entry to record the sale of treasury stock? A. Option a B. Option b C. Option c D. Option d

Q: Which one of the following is the entry to record the original sale of the stock? A. Option a B. Option b C. Option c D. Option d

Q: Treasury stock is reported within the balance sheet as A. a long-term investment. B. a short-term investment. C. an account contra to retained earnings. D. an account contra to owners' equity.

Q: Which of the following statements is correct if treasury stock costing $25,000 was sold for $27,500? A. Total owners' equity increases $2,500. B. Total owners' equity increases $27,500. C. Net income increases $2,500. D. Total owners' equity increases $25,000.

Q: Cash dividends paid by a corporation A. are an expense of the corporation that declared the dividend. B. reduces the net income of the corporation that declared the dividend. C. reduces the retained earnings of the corporation that declared the dividend. D. reduces the retained earnings of the corporation that declared the dividend because net income is reduced by the amount of the dividend.

Q: Which of the following does not accurately describe the proprietary view of the firm? A. Its focus is on the firm's net assets. B. It is the prevailing view of GAAP. C. Its focus is on owners' equity. D. Whether creditors or shareholders provided the firm's assets is irrelevant.

Q: Two companies, Company A and Company B, issue convertible bonds at par. If Company A uses IFRS and Company B follow U.S. GAAP, the amount Company A records for interest expense will be greater than the amount Company B records for interest expense.

Q: By using the book value method to record the conversion of convertible bonds, managers are able to protect themselves from recording conversion losses.

Q: According to current GAAP, convertible bonds must be recorded at the value of debt only, with no value assigned to the conversion feature.

Q: Current GAAP requires the allocation of total share-based compensation cost to expense on a straight-line basis over the vesting period.

Q: Current GAAP requires companies to measure the fair value of stock options at the grant date.

Q: Current GAAP requires that share-based compensation be expensed at the grant date of the stock options award.

Q: Opposition to the FASB review of APB No. 25 on stock options arose because stock options do not involve a cash outflow, and to treat them as an expense violates materiality.

Q: SFAS No. 123 required companies to use the fair value approach when determining compensation expense pertaining to stock options.

Q: Many start-up high-growth companies use stock options as a means of attracting talented employees while attempting to conserve cash.

Q: One reason that companies issue stock options is to attempt to align employees' interests with the interests of the owners.

Q: The comparability of earnings per share across firms is influenced by the relative amount of capital raised by the various firms and by the ability of the firms to manage their reported earnings per share.

Q: The "if-converted" method for computing earnings per share dilution understates diluted earnings per share when a company's share price is substantially below the conversion price of the debt.

Q: Diluted earnings per share will always be shown on the income statement for companies with complex capital structures.

Q: A company has stock options outstanding which allow the holders of the options to buy 12,000 shares of common stock; therefore 12,000 shares will be added to the denominator when calculating diluted earnings per share.

Q: A convertible bond's net-of-tax interest expense is added back to net income when determining diluted earnings per share only if the bond is known to be dilutive.

Q: Current GAAP requires that all convertible bonds be considered as if converted and included in the denominator of diluted earnings per share.

Q: Convertible bonds that were outstanding during the entire year will not have an impact on the weighted average number of common shares outstanding used in the calculation of basic earnings per share.

Q: The diluted EPS figure is a conservative measure of the earnings flow to each share of stock.

Q: If a firm has a complex capital structure, GAAP requires that both basic and fully diluted earnings per share must be reported.

Q: When a company has no convertible securities and no stock options or warrants outstanding, the company has a simple capital structure.

Q: Under IFRS a company may report either a statement of financial position or a statement of changes in shareholders' equity but it need not provide both statements.

Q: Under IFRS most preference shares are reported as equity and dividends are treated as interest expense on the income statement.

Q: When a company repurchases its own shares, the transaction may not result in treasury stock being reported on the balance sheet.

Q: When a loan agreement restricts a company from distributing its entire balance of retained earnings as dividends to shareholders, restricted retained earnings must be reported separately from unrestricted retained earnings on the face of the balance sheet.

Q: Under current GAAP a stock dividend declaration and distribution will not reduce either total assets or total owners' equity.

Q: The book value of owners' equity gives an accurate picture of potentially legal asset distributions in states that have adopted the 1984 Revised Model Business Corporation Act.

Q: The 1984 Revised Model Business Corporation Act would potentially allow a corporation to have negative book value of net assets after an asset distribution occurred.

Q: Corporate distributions to shareholders are governed by state law and are consistent from state to state.

Q: Mandatorily redeemable preferred stock dividends are reported as interest expense on the income statement.