Corporate Reporting: Profit, Earnings per Share, and Retained Earnings
Chapter Opening Critical Thinking Challenge Questions*
What factors, other
... [Show More] than the repurchase of shares, cause earnings per share to increase or decrease?
Other factors that cause earnings per share to:
• Increase: increase in profit, reverse share split (although most students would not know this), decrease in payment of preferred dividends
• Decrease: loss or decreases in profit, share splits, share dividends, issuance of shares, increase in payment of preferred dividends
*The Chapter 13 Critical Thinking Challenge questions are asked at the beginning of this chapter. Students are reminded at the conclusion of the chapter to refer to the Critical Thinking Challenge questions at the beginning of the chapter. The solutions to the Critical Thinking Challenge questions are available here in the Solutions Manual and accessible to students at Connect.
Knowledge Check-Up Questions
1. a) 2. d) 3. b) 4. b) 5. d)
6. c) 7. d) 8. b) 9. c) 10. c)
Concept Review Questions
1. A share dividend produces a distribution of additional shares to shareholders and a capitalization of retained earnings. In contrast, a share split calls in the old shares and replaces them with a different number of new shares. In addition, no entry is made to any of the equity accounts for a share split.
2. Declaring a share dividend has no effect on assets, liabilities, or total equity. The subsequent distribution of the share dividend also has no effect on these items.
3. Indigo’s March 31, 2018 balance in share capital was 26,800,609 shares. A review of Note 15, Share Capital shows that the increase in shares from 2017 to 2018 was caused by options exercised.
4. With a simple capital structure, earnings per share results are calculated by first subtracting any declared or cumulative preferred dividends from profit, and then dividing the difference by the weighted-average number of shares of outstanding common shares.
5. Spin Master’s financial statements report that basic EPS increased from $0.99 per share in 2016 to $1.58 per share for 2017.
6. WestJet’s shares were reduced in 2016 and 2017 as shares were repurchased, 5,954,949 in 2016 and 3,523,597 in 2017. Some shares were issued for compensation plans, but much less than were repurchased.
7. This new decision is a change in an accounting estimate, not a change in accounting policy. The change would be included in the current financial statements with decreased depreciation over the remaining six years of the asset’s revised useful life.
8. The Apple executives made the decision to do a 7:1 stock split to bring the per unit share price down and become more accessible for the individual investor. The stock split resulted in the stock going from over $645.57 per share to a more accessible $92.44. [Show Less]