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TOA - BVPS & EPS

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. In computing basic earnings per share, the full amount of the required preference dividends on
cumulative preference share for the period shall be
a. Ignored
b. Deducted from the net income only when declared
c. Deducted from the net income whether declared or not
d. Added to net income whether declared or not

2. If a new issue of shares for cash is made between the year-end and the date that the financial
statements are authorized
a. The EPS for both the current and the previous year are adjusted.
b. The EPS for the current year only is adjusted.
c. No adjustment is made to EPS.
d. Diluted EPS only is adjusted.

3. In computing diluted EPS, dividends on convertible cumulative preference share shall be

a. Ignored
b. Deducted from net income, whether declared or not
c. Deducted from net income only when declared
d. Added to net income net of tax

4. What is the inherent justification underlying the concept of potential ordinary shares in an earnings per
share computation?
a. Form over substance
b. Substance over form
c. Form and substance considered equally
d. Substance over form or form over substance depending on the circumtances

5. For an entity having several different issues of convertible securities, share options and warrants, the
standard required selection of the combination of securities producing
a. The lowest possible earnings per share.
b. The highest possible earnings per share.
c. The earnings per share figure midway between the lowest possible and the
highest possible earnings per share.
d. Any earnings per share figure between the lowest possible and the highest
possible earnings per share.

6. The following statements relate to the term “dilution” in EPS computation. Which statement is true?

I. A reduction in earnings per share is an example of dilution.

II. A reduction in loss per share is an example of dilution.

a. I only c. Both I and II

b. II only d. Neither I nor II

7. In computing diluted EPS, interest expense on convertible bond payable shall be

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a. Added back to net income at gross c. Deducted from net income net of tax
b. Added back to net income net of tax d. Ignored

8. Earnings per share shall be computed on the basis of

a. Ordinary shares outstanding at the end of the year
b. Ordinary shares outstanding at the beginning of the year
c. Ordinary shares outstanding at the middle of the year
d. Average ordinary shares outstanding during the year

9. In computing basic earnings per share, the amount of preference dividends on noncumulative
preference shares shall be
a. Deducted from net income whether declared or not
b. Deducted from net income only when declared
c. Added to net income only when declared
d. Ignored

10. The “if converted” method of computing earnings per share assumes conversion of convertible securities
as of the
a. Beginning of the earliest period reported or at time of issuance, if later.
b. Beginning of the earliest period reported regardless of time of issuance.
c. Middle of the earliest period reported regardless of the time issuance.
d. Ending of the earliest period reported regardless of the time of issuance.

11. Potential ordinary shares do not include

a. Financial liabilities or equity instruments, including preference shares, that are not
convertible into ordinary shares
b. Share warrants
c. Share options or employee plans that allow employees to receive ordinary shares
as part of their remuneration
d. Shares which would be issued upon the satisfaction of certain conditions resulting
from contractual arrangements, such as purchase of a business

12. When an entity makes a bonus issue/share split/stock dividend or a right issue
a. The previous year’s EPS is not adjusted for the issue.
b. The previous year’s EPS is adjusted for the issue.
c. Only a note of the effect on the previous year’s EPS is made.
d. Only the diluted EPS for the previous year is adjusted.

13. An entity that reports a discontinued operation shall present basic and diluted earnings per share
amounts for such line item
a. Only on the face of the income statement.
b. Only in the notes to the financial statements.
c. Either on the face of the income statement or in the notes to the financial
statements.
d. Only if management chooses to do so as these amounts are not required to be
disclosed either on the face of the income statement or in the notes.

14. EPS disclosures are

a. Required for all public and nonpublic entities
b. Required for public entities and encouraged for nonpublic entities
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c. Encouraged for public entities and required for nonpublic entities

d. Encouraged for all entities

15. The main purpose of reporting diluted earnings per share is to

a. Provide a comparison figure for debt holders.
b. Indicate earnings shareholders shall receive in future periods.
c. Distinguish between entities wiyh a complex capital structure and entities with a
simple capital structure.
d. Show the maximum possible dilution of earnings.

16. What is the correct treatment of a stock dividend issued in mid-year when computing the weighted
average number of shares outstanding for earnings per share purposes?
a. The stock dividend shall be weighted by the length of time that the additional
shares are outstanding during the period.
b. The stock dividend shall be included in the weighted average number of shares
outstanding only if the additional shares result in a decrease of 3 percent or more
in earnings per share.
c. The stock dividend shall be weighted as if the additional shares were issued at the
beginning of the year.
d. The stock dividend shall be ignored since no additional capital was received.

17. For an entity that has only ordinary shares outstanding, total shareholders’ equity divided by the number
of shares outstanding represents the
a. Return on equity c. Book value per share
b. Stated value per share d. Price-earnings ratio

18. It is reduction in earnings per share or an increase in loss per share resulting from the assumption that
convertible instruments are converted, that options or warrants are exercised, or that ordinary shares
are issued upon the satisfaction of specified conditions.
a. Dilution c. Either dilution or antidilution
b. Antidilution d. Neither dilution or antidilution

19. Under the treasury share method, the number of incremental ordinary shares is equal to
a. Option shares
b. Option shares minus assumed treasury shares acquired
c. Assumed treasury shares acquired
d. Option shares actually issued during the year

20. The EPS computation that is forward-looking and based on assumptions about future transactions is
a. Diluted EPS c. Continuing operations EPS
b. Basic EPS d. Discontinued operations EPS

21. Where in the financial statements should basic and diluted EPS figures for income from continuing
operations be reported?
a. In the accompanying notes
b. In management’s discussion and analysis
c. In the income statement
d. In the statement of cash flows

22. Which of the following is correct regarding the effect that dilutive convertible bonds have on the
earnings per share computation?
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a. The number of shares the bonds would be converted is added to the denominator
and interest net of tax is subtracted from the numerator.
b. The number of shares the bonds would be converted is added to the denominator
and interest net of tax is added to the numerator.
c. The number of shares teh bonds would be converted is subtracted from the
denominator and interest net of tax is subtracted from the numerator.
d. The number of shares the bonds would be converted is subtracted from the
denominator and interest net of tax is added to the numerator.

23. When computing diluted EPS, the treasury share method can be used for which of the following?
a. Convertible preference share c. Share option
b. Convertible bond payable d. Rights issue

24. For employee share options, the exercise price shall include
a. Fair value of the share options
b. Intinsic value of the share options
c. Carrying amount of the share options
d. Par value of the share options

25. Options and warrants are dilutive if

a. The exercise price is lower than the average market price.
b. The exercise price is higher than the average market price.
c. The exercise price is equal to the average market price.
d. The option shares represent 20% of the ordinary shares actually outstanding.
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TOA - BVPS & EPS

Answer Section

MULTIPLE CHOICE

1. C

2. C

3. A

4. B

5. A

6. A

7. B

8. D

9. B

10. A

11. A

12. B

13. C

14. B

15. D

16. C

17. C

18. A

19. B

20. A

21. C

22. B

23. C
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24. A

25. A