42 Lecture

1. What is the formula for basic earnings per share (EPS)? A. (Net income - preferred dividends) / Weighted average common shares outstanding B. Net income / Weighted average common shares outstanding C. (Net income - preferred dividends) / Common shares outstanding at the beginning of the period D. None of the above

Answer: B. Net income / Weighted average common shares outstanding

2. Which of the following items is not included in the calculation of diluted EPS? A. Convertible preferred shares B. Convertible bonds C. Stock options D. Ordinary shares

Answer: D. Ordinary shares

3. Which of the following statements is true about the computation of basic EPS? A. The denominator should be based on the number of shares outstanding at the end of the period. B. The numerator should be adjusted for any changes in the number of shares outstanding during the period. C. The denominator should be based on the average number of shares outstanding during the period. D. None of the above

Answer: C. The denominator should be based on the average number of shares outstanding during the period.

4. Which of the following is an example of a potential common share? A. Convertible preferred shares B. Stock options C. Convertible bonds D. All of the above

Answer: D. All of the above

5. Which of the following is an example of a dilutive security? A. Convertible preferred shares B. Non-convertible preferred shares C. Ordinary shares D. All of the above

Answer: A. Convertible preferred shares

6. Which of the following is not a factor that can affect the calculation of EPS? A. Stock splits B. Bonus issues C. Dividend payments D. All of the above can affect the calculation of EPS

Answer: D. All of the above can affect the calculation of EPS

7. Which of the following is not a requirement of IAS 33 regarding the presentation of EPS information in financial statements? A. Companies must present both basic and diluted EPS figures. B. Companies must disclose the number of potential ordinary shares outstanding. C. Companies must disclose the dilutive effect of potential ordinary shares. D. All of the above are requirements of IAS 33.

Answer: D. All of the above are requirements of IAS 33.

8. Which of the following is an example of a potentially dilutive security? A. Convertible bonds B. Non-convertible bonds C. Common shares D. None of the above

Answer: A. Convertible bonds

9. If a company has a net loss for the period, which of the following statements is true regarding the calculation of EPS? A. Basic EPS is not calculated for a net loss period. B. Diluted EPS is not calculated for a net loss period. C. Basic and diluted EPS are both calculated for a net loss period. D. None of the above.

Answer: A. Basic EPS is not calculated for a net loss period.

10. Which of the following items is not a potential ordinary share? A. Common shares B. Convertible preferred shares C. Stock options D. All of the above are potential ordinary shares

Answer: B. Convertible preferred shares

1. What is the difference between basic EPS and diluted EPS? Answer: Basic EPS is calculated based on the number of outstanding common shares while diluted EPS takes into account the potential dilutive effect of convertible securities and other instruments that could increase the number of shares outstanding.

2. What is a potential ordinary share? Answer: A potential ordinary share is a security or instrument that has the potential to be converted into ordinary shares and affect the calculation of EPS.

3. What is a convertible security? Answer: A convertible security is a financial instrument, such as a bond or preferred share, that can be converted into common shares, potentially diluting the number of shares outstanding and affecting the calculation of EPS.

4. How do stock dividends and stock splits affect the calculation of EPS? Answer: Stock dividends and stock splits can affect the calculation of EPS by increasing the number of shares outstanding, thereby reducing the EPS figure.

5. Why is EPS important for investors and analysts? Answer: EPS is important for investors and analysts because it measures the profitability of a company on a per-share basis and provides insight into a company's earnings potential and financial health.

6. What is the difference between basic EPS and diluted EPS in terms of potential ordinary shares? Answer: Basic EPS only considers outstanding ordinary shares, while diluted EPS takes into account both outstanding ordinary shares and potential ordinary shares.

7. What is the difference between a simple capital structure and a complex capital structure? Answer: A simple capital structure has only common shares outstanding, while a complex capital structure has potential ordinary shares, such as convertible securities or stock options.

8. What are the disclosure requirements under IAS 33 for companies reporting EPS? Answer: Companies reporting EPS under IAS 33 must disclose both basic and diluted EPS figures, the number of potential ordinary shares outstanding, and the dilutive effect of potential ordinary shares.

9. What are the limitations of using EPS as a measure of a company's profitability? Answer: The limitations of using EPS as a measure of a company's profitability include potential manipulation of earnings through share buybacks and the exclusion of important factors such as operating expenses and capital expenditures.

10. What is the impact of convertible securities on the calculation of EPS? Answer: Convertible securities can dilute the number of shares outstanding and increase the denominator used in the EPS calculation, potentially reducing the EPS figure.

IAS 33, Earnings per Share (EPS), is a financial reporting standard that sets out the guidelines for the calculation and disclosure of a company's earnings per share. EPS is an important financial metric used by investors and analysts to evaluate a company's profitability and financial performance. The standard requires companies to report both basic and diluted EPS figures in their financial statements. Basic EPS is calculated by dividing the company's net income for the period by the weighted average number of outstanding common shares during the period. Diluted EPS takes into account the potential dilutive effect of convertible securities, options, warrants, and other instruments that could increase the number of shares outstanding. The diluted EPS calculation assumes that all potential ordinary shares have been converted or exercised, and the resulting net income is divided by the weighted average number of outstanding shares, including potential ordinary shares. IAS 33 also defines the difference between a simple capital structure and a complex capital structure. A simple capital structure is one that has no potential ordinary shares, while a complex capital structure has potential ordinary shares, such as convertible securities or stock options. Companies with a complex capital structure are required to report both basic and diluted EPS figures. The standard also requires companies to disclose the number of potential ordinary shares outstanding, the dilutive effect of potential ordinary shares, and the assumptions used in the calculation of diluted EPS. Companies must also disclose any changes in their capital structure that could affect the calculation of EPS, such as stock dividends or stock splits. While EPS is a widely used metric to evaluate a company's profitability, it has its limitations. EPS does not take into account other important financial metrics such as operating expenses, capital expenditures, and the company's overall financial health. Companies can also manipulate EPS figures by engaging in share buybacks or other financial engineering tactics. In conclusion, IAS 33 provides clear guidelines for the calculation and disclosure of EPS, which is an important financial metric used by investors and analysts to evaluate a company's profitability and financial performance. While EPS has its limitations, it remains a valuable tool for investors and analysts when used in conjunction with other financial metrics and qualitative analysis of a company's financial health.