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Chapter 4: Question 25Q (page 180)

Neumann Company computed earnings per share as follows.

Net income

_____________________________________

Common shares outstanding at year-end

Neumann has a simple capital structure. What possible errors might the company have made in the computation? Explain.

Short Answer

Expert verified

According to the given situation, the earnings per share would reflect an inaccurate amount.

Step by step solution

01

Meaning of Earnings Per Share

Earnings per share represent the per share earnings generated by a business entity on its outstanding common stock. It is computed by dividing the profits with outstanding common stock.

02

Possible errors made by the company

  • In the case of a simple capital structure, the ideal way to compute EPS is to deduct the preferred stock dividend from the net income. Here the company is considering net income without deducting such dividends.
  • Also, the denominator should contain the outstanding number of shares, not the outstanding amount. Hence, the total amount outstanding for common stock should be divided by the number of shareholders to determine the number of common stock outstanding.

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Most popular questions from this chapter

(Income Statement, EPS) Presented below are selected ledger accounts of Tucker Corporation as of December 31, 2017.

Cash $50,000

Administrative expenses 100,000

Selling expenses 80,000

Net sales 540,000

Cost of goods sold 210,000

Cash dividends declared (2017) 20,000

Cash dividends paid (2017) 15,000

Discontinued operations (loss before income taxes) 40,000

Depreciation expense, not recorded in 2016 30,000

Retained earnings, December 31, 2016 90,000

Effective tax rate 30%

Instructions

  1. Compute net income for 2017.
  2. Prepare a partial income statement beginning with income from continuing operations before income tax, and including appropriate earnings per share information. Assume 10,000 shares of common stock were outstanding during 2017.

Question: Which of the following is not reported in an income statement under IFRS?

(a) Discontinued operations.

(b) Extraordinary items.

(c) Cost of goods sold.

(d) Income tax.

You run into Greg Norman at a party and begin discussing financial statements. Greg says, 鈥淚 prefer the single step income statement because the multiple-step format generally overstates income.鈥� How should you respond to Greg?

Indicate the section of a multiple-step income statement in which each of the following is shown.

(a) Loss on inventory write-down.

(b) Loss from strike.

(c) Bad debt expense.

(d) Loss on disposal of a discontinued operation.

(e) Gain on sale of machinery.

(f) Interest revenue.

(g) Depreciation expense.

(h) Material write-offs of notes receivable.

Finley Corporation had income from continuing operations of \(10,600,000 in 2017. During 2017, it disposed of its restaurant division at an after-tax loss of \)189,000. Prior to disposal, the division operated at a loss of $315,000 (net of tax) in 2017 (assume that the disposal of the restaurant division meets the criteria for recognition as a discontinued operation). Finley had 10,000,000 shares of common stock outstanding during 2017. Prepare a partial income statement for Finley beginning with income from continuing operations.

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