Test Bank | EPS Earnings per Share - 9e

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Chapter 24 Testbank

1. Earnings per share (EPS) is a ratio that is determined by dividing a company's profit, or loss, as attributable to ordinary shareholders, by the weighted-average number of ordinary shares that an organisation has on issue during the accounting period.

True   False

2. In the early years of a firm's existence—in what we might refer to as the 'growth phase'—we might anticipate lower EPS.

True   False

3. Analysts typically use measures of EPS to then derive other indicators, such as measures of 'price earnings' and 'dividend payout' ratios.

True   False

4. Lower EPS is a perfect indicator of poor performance.

True   False

5. Which of the following entities is not in the scope of AASB 133 Earnings per Share?

A. Sole proprietorships

B. Reporting entities in the process of listing on the Australian Securities Exchange

C. Entities that voluntarily disclose earnings per share

D. Reporting entities with ordinary shares listed on the Australian Securities Exchange

6. The earnings per share figure is likely to be of interest to shareholders and potential investors because:

A. a higher EPS always results in higher DPS

B. it may be a useful indicator of company's past year performance

C. it is conceivable that the higher the firm's earnings (profits), the higher the value of the future cash flows and hence the higher the value of the firm's securities

D. it calculates the return on the capital invested by each shareholder for the period and so is a key benchmark for evaluating the success of the entity

7. Under which of the following situations would the potential ordinary shares be included in the calculation of diluted earnings per share?

A. Where conversion of the potential ordinary shares would increase the loss from continuing ordinary operations per share

B. Where conversion of the potential ordinary shares would increase earnings per share

C. Where earnings per incremental share are greater than basic earnings per share

D. Where conversion of the potential ordinary shares would decrease the loss from continuing ordinary operations per share

8. In order to determine whether or not potential ordinary shares are dilutive, AASB 133 requires:

A. each issue to be considered separately and ranked from greatest dilution to least dilution

B. each issue to be included in the calculation on the basis of date of issue, i.e. earliest to the latest issue

C. each issue to be considered separately and included in the calculation in the order of the number of ordinary shares to be potentially issued, from highest to lowest

D. that all the issues are to be considered on an aggregate basis

9. Tucson Ltd reported a net income after tax of $2 850 000 for the year ended 30 June 2022. The capital structure of Tucson Ltd follows:

Tucson Ltd paid its preference shareholders during the year and there are no dividends in arrears. All potential ordinary shares were outstanding on 1 July 2021.

The company's tax rate is 30 per cent.

In accordance with AASB 133, what should the basic earnings per share and diluted earnings per share for Tucson Ltd be?

A. $5.64; $5.48

B. $5.64; $5.44

C. $5.70; $5.44

D. $5.70; $5.48

10. According to AASB 133, for shares to be considered as being issued for no consideration, the price paid for the shares would need to be:

A. greater than the market price.

B. greater than the issued price.

C. less than the market price.

D. less than the issued price.

11. The disclosure of earnings per share is required by the:

A. Australian Customs Authorities

B. Australian Taxation Authorities

C. Australian Accounting Standards Board

D. Australian Auditing Board

12. Which of the following is correct about Easton's (1990) research?

A. Accounting standard changes are incorporated into share prices

B. Accounting earnings announcements do not affect share prices

C. Accounting earnings affect share prices

D. Accounting earnings that are unexpected have twice the market reaction to expected earnings

13. When events are accounted for and displayed in accordance with their economic impact, rather than their legal form, this is referred to as ____________.

A. substance over form

B. consistency

C. the prudence concept

D. the materiality concept

14. _________ are preference shares with the attribute that if dividends are not paid in a particular year, they must be paid in later years before ordinary shareholders receive any dividends.

A. Non-convertible preference shares

B. Convertible preference shares

C. Cumulative dividend preference shares

D. Convertible non-cumulative preference shares

15. In a/an _________ shareholders are given extra shares at no cost in proportion to their shareholding. It is usually funded from retained profits and has no net effect on owners' equity.

A. right issue

B. bonus issue

C. option contract

D. share split

16. _____________ is the total value of a firm's securities computed by multiplying the current market value of each security by the number of securities issued by the entity.

A. Value capitalisation

B. Firm capitalisation

C. Market capitalisation

D. Security capitalisation

17. Ordinary shares are a class of shares that typically rank ______ in terms of any distribution of capital. Holders _____ voting rights, and will receive dividends at the discretion of the directors.

A. last; do not have

B. first; have

C. last; have

D. first; do not have

18. Bonuses paid to key management personnel are often linked to measures of _______.

A. EPS

B. total assets

C. debt equity ratio

D. None of the given answers are correct.

19. Earnings per share is a measure of performance that indicates how much __________ being generated in respect of each ordinary share that a company has on issue.

A. debt is

B. asset is

C. retained earnings are

D. profit is

20. _______________is a ratio that is determined by dividing a company's profit, or loss, for an accounting period that is attributable to ordinary shareholders by the weighted-average number of ordinary shares that an organisation has on issue during that accounting period.

A. Debt to equity

B. Earnings per share

C. Total asset to turnover

D. Price earnings

21. Analysts typically use measures of EPS to then derive other indicators, such as measures of price earnings and___________ ratios.

A. equity

B. leverage

C. asset turnover

D. dividend payout

22. According to paragraph 5 of AASB 133, contingently issuable ____________ are those shares issuable for little or no cash or other consideration upon the satisfaction of specified conditions in a contingent share agreement.

A. ordinary shares

B. bonus shares

C. potential ordinary shares

D. non-convertible preference shares

23. AASB 133 Earnings per Share requires the disclosure of 'basic earnings per share' and 'diluted earnings per share' and applies to:

A. all companies listed on the Australian Securities Exchange

B. entities that have on issue ordinary shares and are in the process of listing

C. entities that voluntarily elect to disclose earnings per share

D. All of the given answers are correct.

24. For the purpose of calculating ____________, an entity shall adjust profit or loss attributable to ordinary equity holders of the parent entity, and the weighted average number of shares outstanding, for the effects of all dilutive potential ordinary shares. (AASB 133)

A. diluted earnings per share

B. anti-dilutive earnings per share

C. earnings per share

D. price earnings ratio

25. Generally it is preferred to see a(n) ________ EPS for a given organisation.

A. higher

B. lower

C. average

D. None of the given answers are correct.

26. Explain the manner in which the weighted-average number of shares for diluted earnings per share is calculated in accordance with AASB 133.

______________________________________________________________________________

27. Discuss the manner in which securities are considered as dilutive or anti-dilutive.

______________________________________________________________________________

28. Explain the concept of 'contingently issuable shares' and how it affects calculations of diluted EPS.

______________________________________________________________________________

29. How is earnings per share (EPS) determined?

______________________________________________________________________________

30. Discuss the disclosure of earnings per share as per AASB 133.

______________________________________________________________________________

31. Discuss the value of a firm's securities as suggested by classical finance theory.

______________________________________________________________________________

32. Why is it necessary to know about the earnings per share of an organisation?

______________________________________________________________________________

33. Is it true that the higher the EPS, the higher the dividends?

______________________________________________________________________________

34. Briefly explain diluted earnings per share.

______________________________________________________________________________

35. What is meant by weighted-average number of shares?

______________________________________________________________________________

36. What is meant by cumulative dividend preference shares?

______________________________________________________________________________

37. List some of the indicators analysts derive from the measures of EPS.

______________________________________________________________________________

38. Why is EPS not a perfect indicator of performance?

______________________________________________________________________________

Chapter 24 Testbank