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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

Brisky Corporation had net sales of \(2,400,000 and interest revenue of \)31,000 during 2017. Expenses for 2017 were cost of goods sold \(1,450,000, administrative expenses \)212,000, selling expenses \(280,000, and interest expense \)45,000. Brisky’s tax rate is 30%. The corporation had 100,000 shares of common stock authorized and 70,000 shares issued and outstanding during 2017. Prepare a single-step income statement for the year ended December 31, 2017.

The following are selected ledger accounts of Spock Corporation on December 31, 2017.

Cash \( 185,000 Salaries and wages expense (sales) \)284,000

Inventory 535,000 Salaries and wages expense (office) 346,000

Sales revenue 4,275,000 Purchase returns 15,000

Unearned sales revenue 117,000 Sales returns and allowances 79,000

Purchases 2,786,000 Freight-in 72,000

Sales discounts 34,000 Accounts receivable 142,500

Purchase discounts 27,000 Sales commissions 83,000

Selling expenses 69,000 Telephone and Internet expense (sales) 17,000

Accounting and legal services 33,000 Utilities expense (office) 32,000

Insurance expense (office) 24,000 Miscellaneous office expenses 8,000

Advertising expense 54,000 Rent revenue 240,000

Delivery expense 93,000 Casualty loss (before tax) 70,000

Depreciation expense (office equipment) 48,000 Depreciation expense (sales equipment) 36,000

Common stock (\(10 par) 900,000 Interest expense 176,000

Spock’s effective tax rate on all items is 34%. A physical inventory indicates that the ending inventory is \)686,000.

Instructions

Prepare a condensed 2017 income statement for Spock Corporation.

C.Reither Co. reports the following information for 2017: sales revenue \(700,000, cost of goods sold \)500,000, operating expenses \(80,000, and an unrealized holding loss on available-for-sale securities for 2017 of \)60,000. It declared and paid a cash dividend of \(10,000 in 2017. C Reither Co. has January 1, 2017, balances in common stock \)350,000; accumulated other comprehensive income \(80,000; and retained earnings \)90,000. It issued no stock during 2017.

Instructions

Prepare a statement of stockholders’ equity.

(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.

Distinguish between the modified all-inclusive income statement and the current operating performance income statement. According to present generally accepted accounting principles, which is recommended? Explain.
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