1.Define the term earnings per shareas it applies to a corporation with a capitalization structure composed of only one class of common stock. Then explain how EPS shouldbe computed and how the information should be disclosed in the corporation's financial statements. 2.Explain the meanings of the terms senior securitiesand residual securities(terms often used in discussing EPS), and give examples of the types of items that each termincludes. 3. Discuss the treatment, if any, that should be given to each of the following items in computing EPS for financial statement reporting: 1. The declaration of current dividends on cumulative preferred stock 2. The acquisition of some of the corporation's outstanding common stock during the current fiscal year (the stock was classified as treasury stock) 3. A two-for-one stock split of common stock during the current fiscal year 4. A provision created out of retained earnings for a contingent liability from a possible lawsuit 5. Outstanding preferred stock issued at a premium with a par value liquidation right 6. The exercise at a price below market value but above book value of a common stock option issued during the current year to officers of the corporation 7. The replacement of a machine immediately before the close of the current year at a cost 20 percent above the original cost of the replaced machine (the new machine will perform the same function as the old machine, which was sold for its book value) Case 6-5 لحلا a. Earnings per share, as it applies to a corporation with a capitalization structure composed of only one class of common stock, is the amount of earnings applicable to each share of common stock outstanding during the period for which the earnings are reported. The computation of earnings per share should be based on a weighted average of the number of shares outstanding during the period with retroactive recognition given to stock splits or reverse splits and to stock dividends, except relatively small nonrecurring stock dividends may be ignored. The computation should be made for income before extraordinary items, extraordinary items net of income tax, and net income. The earnings per share from each of the foregoing should be presented in the income statement and it is desirable that the method of computation be disclosed. b. Meanings of terms often used in discussing earnings per share and the types of items to which they apply follow: 1. Senior securities are securities which have preference to before earnings are allocated to common stock. Cumulative preferred dividends whether or not earned should be deducted from net income except "if earned" dividends should be deducted only to the extent earned. Preferred stock is a senior security if it has a preference on dividends. Bonds are a senior security and interest expense on the bonds enters into the determination of net income.
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