Ratio, Foreign Currency&EPS

Ratio, Foreign Currency&EPS

KG/LI/PE

Ratio, Foreign Currency & EPS ￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣￣

1

Ratios help to pinpoint possible problem areas, and facilitate comparisons between companies and

between companies and industry averages. Ratios can be grouped into the following 3 areas:

I. SOLVENCY A. Liquidity or Short Term Solvency B. Long Term Solvency

II. OPERATIONAL EFFICIENCY III. PROFITABILITY

The most frequently tested ratios in each area are:

I. SOLVENCY

A. Liquidity

1. Working Capital = Current Assets – Current Liabilities

2. Current Ratio = Current Assets

Current Liabilities

3. Acid Test or Quick Ratio

= Cash + Marketable Securities + Assets. Rec.

Current Liabilities

In (1), (2) and (3) above, the higher the number the stronger the current financial position – UP TO A POINT OF DIMINISHING RETURNS.

B. Long Term Solvency

1. Debt to Equity = Total Liabilities

Total Owner’s Equity

2. Times Interest Earned = Income before Interest and Income Tax

Interest Expense

FINANCIAL STATEMENTS AND RATIO ANALYSIS


2

II. OPERATIONAL EFFICIENCY

1. Accounts Receivable Turnover =

Net Credit Sales

Average Accounts Receivable Balance

(Beginning Balance + Ending Balance÷2)

2. Number of Days Sales in Receivables

= 365

Accounts Receivable Turnover

e.g. IF: Net Credit Sales = $1,000,000

Average Accts. Rec = ¥100,000

Accounts Receivable Turnover

$1,000,000 = 10

$ 100,000

Jan 1 365 Days Dec 31

So--each segment above must be 365÷ 10 or 36.5 Days = “Number of Days Sales in

Receivables” or the average number of days it takes to collect an Accounts Receivable.

3. Inventory Turnover = Cost of Goods Sold

Average Inventory Balance

(Beginning Balance + Ending Balance ÷ 2)

4. Number of Days Supply in Inventory

= 365

Inventory Turnover

5. Operating Cycle = Average time period from purchase of inventory to collection on sale of product. Can be computed by adding together.

Number of Days Sales in Receivables + Number of Days Supply in Inventory Operating Cycle


3

III. PROFITABILITY

1. Return on Assets (Return On Investment)

= Net Income + Interest Expense

Average Total Assets

2. Return on Equity =

Net Income

Average Stockholder’s Equity

3. Book Value per

= Stockholder’s Equity Allocated to Common Stock*

Common Share Number of Common Share Outstanding

*Total Stockholders’ Equity LESS the greater of Par or Liquidation Value of Preferred Stock LESS dividends in arrears on Preferred Stock, if any.

4. Books Value per Preferred Share

= Greater of:・・・

Par OR Liquidation Value per Share

+ Dividends in Arrears per Share

Number of Preferred Shares Outstanding

5. Price Earnings Ratio = Market Price per Share

E.P.S.


4

PURPOSE: Convert foreign subsidiary to U.S. dollars

REASON: To consolidate the financial statements

METHODS: I. Translation method (foreign currency = functional currency)

II. Remeasurement method (U.S. currency = functional currency)

FUNCTIONAL CURRENCY:

METHODS: I. FOREIGN CURRENCY A. Foreign subsidiary is autonomous (all activities abroad) B. Not highly inflationary economy

II. U.S. CURRENCY

A. Foreign subsidiary has many intercompany transactions B. Cumulative inflation over last 3 years in that foreign country has been 100%

or more.

TRANSLATION METHOD: Foreign currency = functional currency

INCOME STATEMENT

Weighted Average Transfer Net Income to Retained Earnings

BALANCE SHEET

Current Rate / Year End Plug “Cumulated Translation Adjustment” to Equity – Accumulated Balance of

Other Comprehensive Income*

*FASB 130: “Other comprehensive income”

REMEASUREMENT METHOD: US$ = functional currency

BALANCE SHEET

Monetary at Current / Year End Non Monetary at Historical

INCOME STATEMENT

Weighted Average Historical for Balance Sheet Expenses

Depreciation /PP&E Cost of Goods Sold / Inventory Amortization / Bonds & Intangibles

Plug “Currency Gain / Loss “ to get net income from continuing operations to the required amount needed for balance sheet (and retained earnings)

FOREIGN OPERATIONS


5

KRISTI CORPORATION Foreign Currency Financial Statements, Expressed in Dollars

at and for the year ended December 31, 199X

Translation Method Remeasurement Method

Income Statement Exchange Rate Dollars Exchange Rate Dollars

Sales LCU 525,000 *$.1275 $66,938 $.1275 $66,938 Costs and expenses: Cost of goods sold LCU 400,000 .1275 $51,000 .1275 $51,000 Depreciation expense 22,000 .1275 2,805 .18 3,960 Selling expenses 31,000 .1275 3,953 .1275 3,953 Other operating expenses 11,000 .1275 1,403 .1275 1,403 Income taxes expenses 19,000 .1275 2,423 .1275 2,423 Total costs and expenses LCU 483,000 $61,584 $62,739 Currency exchange (gain) PLUG → (6,854) Net income LCU 42,000 $ 5,354 $11,053

Statement of Retained Earnings Retained earnings, beginning of year LCU -0- -0- -0- Net income 42,000 $ 5,354 $11,053 Retained earnings, end of year LCU 42,000 $ 5,354 $11,053

Balance Sheet - Assets Cash LCU 10,000 .10 $ 1,000 .10 $ 1,000 Accounts receivable (net) 50,000 .10 5,000 .10 5,000 Inventories (at cost) 95,000 .10 9,500 .1275 12,113 Fixed assets 275,000 .10 27,500 .18 49,500 Accumulated depreciation (22,000) .10 (2,200) *** (3,960) Total assets LCU 408,000 $40,800 $63,653

Liabilities & Stockholders’ Equity Accounts payable LCU 34,000 .10 $ 3,400 .10 $ 3,400 Long-term debt 132,000 .10 13,200 .10 13,200 Common stock 10,000 shares 200,000 .18 36,000 .18 36,000 Retained earnings 42,000 5,354 PLUG → 11,053 Accum. bal. of other comprehensive income: Cumulative translation adjustments PLUG → ** (17,154) Total liabilities. & stockholders’ equity LCU 408,000 $40,800 $63,653

* ($.18*3)+($.13*3)+($.10*6) = .1275

*** 22,000 =

X X =$3,960 (or $.18 in this case)

12 275,000 49,500 ** Residual amount (to balance)

EXAMPLE Financial statements of the Kristi Corporation, a foreign subsidiary of the Dollar Corporation. (a U.S. company) are shown below at and for the year ended

December 31, 199X. The statements are first translated using the LCU (local currency unit) at the functional currency (translation method), then the dollar as the functional currency (remeasurement)

Assumptions: 1. The parent company organized the subsidiary on December 31, 199W.

2. Exchange rates for the LCU were as follows: December 31, 199W to March 31, 199X $ .18 April 1, 199X to June 3D, 199X .13 July 1, 199X to December 31, 199X .10 Weighted Average .1275

3. Inventory was acquired evenly throughout the year and sales were made evenly throughout the year.

4. Fixed assets were acquired by the subsidiary on December 31, 199W.


6

FORWARD EXCHANGE CONTRACTS (HEDGING)

I. Agreement to exchange different currencies at a specified future date and a specific future rate (Forward Rate):

A. In Hedging contracts to speculate in foreign currency: gains / losses based on changes in forward rate for remaining maturity compared to contract forward rates.

B. Economic Hedges of investments in foreign subsidiary not included in net income, per FASB 130 reported as other comprehensive income. (appears as part of Stockholders’ Equity – translation adjustment).

C. Hedge against purchase commitment gains/losses deferred and recorded as adjustments of cost of asset.

TRANSACTION

I. When a transaction has taken place between two companies from different countries (U.S. and foreign), a transaction gain or loss must be calculated.

3 key Dates:

Transaction Date Date of Purchase / Sale

Intervening Balance Sheet Date Usually end of period

Settlement Date Date invoice must be paid

If there has been any change in the value of foreign currency [spot rate] between any of the above three dates, a transaction gain or loss will result and be reported as a component of income from continuing operations. (IDEA)


7

I.

EARNINGS PER SHARE

Basic EPS = N.I.A.T – PREFERRED STOCK DIVIDENDS

OUTSTANDING COMMON SHARES

1. N.I.A.T. = NET INCOME AFTER TAXES

2. PREFERRED STOCK DIVIDENDS:

A. Noncumulative = Declared only (whether or not paid)

B. Cumulative = Accumulated during period (whether or not earned)

3. OUTSTANDING SHARES A. Outstanding during period – Give weighted average effect

B. Contingently issuable shares – To be issued for little or no cash consideration upon the satisfaction of certain conditions, shall be considered outstanding common shares as of the date all necessary conditions have been satisfied (in essence, when issuance of the shares is no longer contingent.)

Diluted EPS = N.I.A.T – PREFERRED STOCK DIVIDENDS

OUTSTANDING + DILUTIVE POTENTIAL COMMON SHARES

1. N.I.A.T. = NET INCOME AFTER TAXES

ADJUSTED TO ADD BACK: A. After-tax amount of interest associated with convertible debt.

B. Any other changes in income or loss (profit sharing expenses)

2. PREFERRED STOCK DIVIDENDS: (Ignore any convertible preferred stock)

A. Noncumulative = Declared only (whether or not paid) B. Cumulative = Accumulated during period (whether or not earned)

3. OUTSTANDING SHARES

A. Outstanding during period – Give weighted average effect

B. Contingently issuable shares – To be issued for little or no cash consideration upon the satisfaction of certain conditions, shell be considered outstanding common shares as of the date all necessary conditions have been satisfied (in essence, when issuance of the shares is no longer contingent.)

4. DILUTIVE POTENTIAL COMMON SHARES – The following items, when dilutive, shall be treated as converted for the computation of dilutive earnings per share:

A. Options & Warrants 1. Stock based compensation arrangements 2. Written put options 3. Purchased options

B. Convertible Bonds

C. Convertible Preferred Stock

D. Contracts that may be settled in stock or cash

E. Other Contingently issuable shares (exclusive of 3.B. above)


8

EXAMPLE

The Nice Corporation engaged in the following stock transactions during 19XI:

Jan. 1 Issued 10,000 shares.

July 1 Issued another 5,000 shares.

Sept. 1 Bought back 2,000 treasury shares.

Oct. 1 Issued 7,000 shares.

The weighted average calculation is as follows:

Jan. 1-July 1 = 6 months × 10.000 shares = 60,000

July 1-Sept.1 = 2 months × 15,000* shares = 30,000

Sept. 1-Oct.1 = 1 month × 13,000✝ shares = 13,000

Oct. 1-Dec.31 = 3 months × 20,000 shares = 60,000

Total 163,000

÷ 12

(rounded) 13,583 shares

*10,000+5,000 ✝10,000+5,000-2,000

If a stock dividend or stock split occurred during the year, we treat it as if it took place at the beginning of the year. Accordingly, a retroactive adjustment must be made.

EXAMPLE

The following stock transactions took place for Corporation X during 19X1:

Jan. 1 Issued 9,000 shares.

Apr. 1 Issued another 1,000 shares.

June 1 Issued a 100% stock dividend (10,000 shares).

Sept. 1 Issued 4,000 shares.

We treat the stock dividend of June 1 as if it were issued on January 1. Thus the stock transactions of January 1 and April 1 must be retroactively adjusted by multiplying them by a factor of 2. The computations are:

Jan. 1-Apr.1 = 3 months × 9,000 shares × 2 = 54,000 Apr. 1-June 1 = 2 months × 10,000 shares × 2 = 40,000 June 1-Sept. 1 = 3 months × 20,000 shares = 60,000 Sept. 1-Dec. 31 = 4 months × 24,000 shares = 96,000

250,000 ÷ 12

(rounded) 20,833

*(9,000+10,000) × 2


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II.

A. SUBSTANCE OVER FORM (Convertible = Common Stock)

B. CONSERVATIVE – Only convert if dilutive (Each year)

C. DISCLOSURE REQUIREMENTS:

1. Reconcile numerator (N.I.A.T. - Preferred Stock Dividends) [BASIC → FULLY DILUTED] Reconcile denominator (actual + convertible) [BASIC → FULLY DILUTED]

2. Effect given to Preferred Stock Dividend (N.I.A.T. - Preferred Stock)

3. Securities that could potentially dilute basic earnings per share in future that were not include in computing dilutive earnings per share (because anti-dilutive…now)

D. PRESENTATION: Show EPS for each “I” “D” “E” “A”

SIMPLE CAPITAL STRUCTURE

Basic EPS Diluted EPS

I ncome from continuing operations

D iscontinued operations N/A

E xtraordinary items

A ccounting adjunstments & changes

ALL OTHER ENTITIES (COMPLEX)

Basic EPS Diluted EPS

I ncome from continuing operations I ncome from continuing operations

D iscontinued operations D iscontinued operations

E xtraordinary items E xtraordinary items

A ccounting adjunstments & changes A ccounting adjunstments & changes

GAAP STANDARDS


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III.

Required in order to eliminate management’s ability to alter or manipulate the EPS by issuing or retiring shares near year end.

A. ACTUAL:

1. C/S O/S all year = 100% (12/12)

2. C/S issued / retired = % (if 7-1-xx = 6/12)

3. C/S dividend / split = retroactive = 100%

4. C/S issued in pooling = retroactive = 100% B. CONVERTIBLE:

1. Warrants & Options – Earliest Date

2. Convertible Bonds – Earliest Date

3. Convertible Preferred Stock – Earliest Date

4. Contingent Issues – Earliest Date

EARLIEST DATE = (A) BEGINNING OF YEAR IF CONVERTIBLE (B) DATE ITEM COULD BE CONVERTED IF LATER JAN. 1, 19XX

WEIGHTED AVERAGE


11

IV.

OPTIONS & WARRANTS

INCLUDING: A. Options & Warrants (Average Market Price > Exercise Price)

Issued Expired Cancelled

B. Written put options and forward purchase contracts Exercise price > average market price (Contract is “in the money”) Use reverse treasury stock method

C. Nonvested stock granted to employees (Grant date; even if exercise contingent upon vesting)

D. Stock purchase contracts E. Partially paid stock subscriptions F. Stock based compensation

EXCLUDING:

A. Purchased put options (Anti-dilutive) [Exercise Price > Market Price] B. Purchased call options (Anti-dilutive) [Market Price > Exercise Price]

Basic EPS = N.I.A.T – PREFERRED STOCK DIVIDENDS


N.I.A.T. – PREFERRED STOCK DIVIDEND


No impact on Basic EPS, since options and warrants are NOT “pretended” to be converted



No impact on Basic EPS, since options and warrants are NOT “pretended” to be converted

Weighted Average: Shares issued, repurchased or retired must be given weight for the portion of the period they were outstanding.

Diluted EPS = N.I.A.T – PREFERRED STOCK DIVIDENDS

OUTSTANDING + DILUTIVE POTENTIAL COMMON SHARES


OUTSTANDING+DILUTIVE POTENTIAL COMMON SHARES


Since equity transactions do not have an effect on the income statement and there is no interest or dividends paid to the holder of the options and warrants, no impact or adjustment is required.


A. Outstanding: given weighted average effect

B. Dilutive Potential Common Shares: If the FMV of the common stock is greater than the exercise price (over the last three months) then “pretend” the options and warrants were converted.

TRESURY STOCK METHOD: Money received from the pretend exercise of

options and warrants is treated as being used to repurchase common stock in open market price

Weighted Average: “Pretend” conversion was made at earliest possible date in year that they could be exercised.

Ratio, Foreign Currency & EPS ‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾‾

12

TRESURY STOCK METHOD

BASIC DILUTED

OPTIONS / COMMON STOCK 1,000

EXERCISE PRICE X $15.00

CASH CORPORATION RECEIVED $

REPURCHASE ÷ ( ) ( )

NET INCREASE “PRETEND”

FACTS: 1000 Options to purchase 1000 common stock shares $15.00 Exercise Price Per Share $20.00 Average Market Price $25.00 Period end Market price

15,000

1,000

20 750

250

N/A


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V.

CONVERTIBLE BONDS

Basic EPS = N.I.A.T ‒ PREFERRED STOCK DIVIDENDS OUTSTANDING COMMON SHARES

N.I.A.T. ‒ PREFERRED STOCK DIVIDEND OUTSTANDING COMMON SHARES

No impact on Basic EPS, since convertible bond is NOT “pretended” to be converted




Diluted EPS = N.I.A.T ‒ PREFERRED STOCK DIVIDENDS OUTSTANDING + DILUTIVE POTENTIAL COMMON SHARES

N.I.A.T. ‒ PREFERRED STOCK DIVIDEND OUTSTANDING+DILUTIVE POTENTIAL COMMON SHARES

N.I.A.T. ‒ PREFERRED STOCK DIVIDEND

Since the convertible bond is being treated as converted into common stock at the period, it cannot also still be a bond payable that pays interest expense (increase income) and accordingly recalculate tax expense based upon the higher net income being used.


A. Outstanding: given weighted average effect B. Dilutive Potential Common Shares: add to

the total share of common stock O/S the “pretend” share of common stock issued when the bond would have been converted.

Weighted Average: “Pretend” the bonds were converted at the earliest possible date in the period they could be.


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IF CONVERTED METHOD

ACTUAL PRETEND

$100 INCOME $100

(20) BOND INTEREST ( )

$80 NET INCOME $

(32) TAXES (40%) ( )

$48 N.I.A.T. AVAILABLE TO COMMON STOCKHOLDERS $

100

0

40

60


15

VI.

CONVERTIBLE PREFERRED STOCK










Since the convertible preferred stock is being treated as converted at the earliest date in period, it cannot also be receiving a preferred stock dividend. There is no adjustment to net income since dividends are not an expense. There is no reduction of income available for a preferred stock dividend to be paid since there are no preferred stockholders after the “pretend” conversion.


A. Outstanding: given weighted average effect B. Dilutive Potential Common Shares: add to

the total share of common stock O/S the “pretend” share of common stock issued when the bond would have been converted.

Weighted Average: “Pretend” the preferred stock was converted at the earliest date it could be converted in the period.


16

VII.

CONTINGENT COMMON STOCK ISSUES



No impact


A. Outstanding: given weighted average effect.

B. If all conditions have been satisfied or if the contingency involves only the passage of time, assume the stock is issued for calculation of Basic EPS.




No impact


A. Outstanding: given weighted average effect B. Dilutive Potential: “pretend” issuing shares

for all contingent shares. All necessary conditions have been satisfied. If not completely satisfied, then amount issuable (if any) so far. If based upon attainment or maintenance of a specific amount of earnings, and that amount has been attained, use if dilutive. If based upon market price of stock at a future date, use shares that would be issuable based upon current market price. If based upon both future earnings and future market price, no share used unless both conditions have been met.


17

MULTIPLE CHOICE QUESTIONS

RATIO ANALYSIS

1. What effect would the sale of a company’s trading securities at their carrying amounts for cash have on each of the following ratios?

Current ratio Quick ratio

a. No effect No effect b. Increase Increase c. No effect Increase d. Increase No effect (6140)

2. In analyzing a company’s financial statements, which financial statement would a potential investor primarily use to assess the company’s liquidity and financial flexibility?

a. Balance sheet b. Income statement c. Statement of retained earnings d. Statement of cash flows

(5270) 3. Heath Co.’s current ratio is 4:1. Which of the

following transactions would normally increase its current ratio?

a. Purchasing inventory on account b. Selling inventory on account c. Collecting an account receivable d. Purchasing machinery for cash

(3471)

4. Zenk Co. wrote off obsolete inventory of $100,000 during 1998. What was the effect of this write-off on Zenk’s ratio analysis?

a. Decrease in current ratio but not in quick ratio b. Decrease in quick ratio but not in current ratio c. Increase in current ratio but not in quick ratio d. Increase in quick ratio but not in current ratio

(2650) 5. Which of the following ratios is(are) useful in

assessing a company’s ability to meet currently maturing or short-term obligations?

Acid-test ratio Debt-to-equity ratio

a. No No b. No Yes c. Yes Yes d. Yes No (9055)

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Item 6 through 8 are based on the following: Selected data pertaining to Lore Co. for the calendar year 1998 is as follows: Net cash sales $ 3,000 Cost of goods sold 18,000 Inventory at beginning of year 6,000 Purchases 24,000 Accounts receivable at beginning of year 20,000 Accounts receivable at the end of year 22,000

6. The accounts receivable turnover for 1998

was 5.0 times. What were Lore’s 1998 net credit sales?

a. $105,000 b. $107,000 c. $110,000 d. $210,000

(5594) 7. What was the inventory turnover for 1998?

a. 1.2 times b. 1.5 times c. 2.0 times d. 3.0 tomes

(5595) 8. Lore would use which of the following to

determine the average days’ sales in inventory? Numerator Denominator

a. 365 Average inventory b. 365 Inventory turnover c. Average inventory Sales divided by 365 d. Sales divided by 365 Inventory turnover

(5596) 9. Which of the following ratios are useful for

evaluating the effectiveness with which the company uses its assets?

Acid-test (quick) ratio

Price-earnings ratio

a. Yes Yes b. Yes No c. No No d. No Yes

(1767)

10. Hoyt Corp.’s current balance sheet reports

the following stockholders’ equity:

5% cumulative preferred stock, par value $100 per share; 2,500 shares issued and outstanding $250,000

Common stock, par value $3.50 per share; 100,000 shares issued and outstanding 350,000

Additional paid-in capital in excess of par value of common stock 125,000

Retained earnings 300,000

Dividends in arrears on the preferred stock amount to $25,000. If Hoyt were to be liquidated, the preferred stockholders would receive par value plus a premium of $50,000. The book value per share of common stock is a. $7.75. b. $7.50. c. $7.25. d. $7.00.

(2451) 11. The following data pertain to Cowl Inc. for the

year ended December 31, 1998:

Net sales $ 600,000 Net income 150,000 Total assets, January 1, 1998 2,000,000 Total assets, December 31, 1998 3,000,000

What was Cowl’s rate of return on assets for 1998?

a. 5% b. 6% c. 20% d. 24%

(6142)

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X (20,000+22,000)÷2

X=105,000

5=

○ 18,000 (6,000+12,000)÷2 =2

150,000 (2,000,000+3,000,000)÷2 =6

1,025,000-250,000-25,000-50,000 100,000

=7


19

FOREIGN OPERATIONS19. Which of the following should be reported in

accumulated other comprehensive income?

a. Discount on convertible bonds that arecommon stock equivalents.

b. Premium on convertible bonds that arecommon stock equivalents.

c. Cumulative foreign exchange translation loss.d. Organization costs.

(4519)

20. Certain balance sheet accounts of a foreignsubsidiary of Rowan Inc., at December 31, 1997, have been translated into U.S. dollars as follows:

Translated at Current rates

Historical rates

Note receivable, long-term $240,000 $200,000 Prepaid rent 85,000 80,000 Patent 150,000 170,000

$475,000 $450,000

The subsidiary’s functional currency is the currencyof the country in which it is located. What total amount should be included in Rowan’s December31, 1997 consolidated balance sheet for the above accounts?

a. $450,000b. $455,000c. $475,000d. $495,000

(9059)

21. A foreign subsidiary’s functional currency is itslocal currency, which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating

Sales to customers Wages expense a. No No b. Yes Yes c. No Yes d. Yes No

(2732)

22. In preparing consolidated financial statementsof a U.S. parent company with a foreign subsidiary, the foreign subsidiary’s functional currency is thecurrency

a. In which the subsidiary maintains its accountingrecords.

b. Of the country in which the subsidiary is located.c. Of the country in which the parent is located.d. Of the environment in which the subsidiary

primarily generates and expends cash.(6785)

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20

23. Gains resulting from the process of translating

a foreign entity’s financial statements from the functional currency, which has not experienced significant inflation, to U.S. dollars should be included as a(an) a. Other comprehensive income item. b. Deferred credit. c. Component of income from continuing

operations. d. Extraordinary item.

(9060) 24. When remeasuring foreign currency financial

statements into the functional currency, which of the following items would be remeasured using historical exchange rates? a. Inventories carried at cost b. Marketable equity securities reported at market

values c. Bonds payable d. Accrued liabilities

(4541) 25. A balance arising from the translation or

remeasurement of a subsidiary’s foreign currency financial statements is reported in the consolidated income statement when the subsidiary’s functional currency is the

Foreign currency U.S. dollar a. No No b. No Yes c. Yes No d. Yes Yes (2088)

26. Gains from remeasuring a foreign subsidiary’s

financial statements from the local currency, which is not the functional currency, into the parent company’s currency should be reported as a(an) a. Deferred foreign exchange gain. b. Other comprehensive income item. c. Extraordinary item, net of income taxes. d. Part of continuing operations.

(2087) 27. On October 1 of the current year, Mild Co., a

U.S. company, purchased machinery from Grund, a German company, with payment due on April 1 of next year. If Mild’s current year operating income included no foreign exchange transaction gain or loss, then the transaction could have a. Resulted in an extraordinary gain. b. Been denominated in U.S. dollars. c. Caused a foreign currency gain to be reported

as a contra account against machinery. d. Caused a foreign currency transaction gain to

be reported in order comprehensive income. (4540)

28. Fogg Co., a U.S. company, contracted to

purchase foreign goods. Payment in foreign currency was due one month after the goods were received at Fogg’s warehouse. Between the receipt of goods and the time of payment, the exchange rates changed in Fogg’s favor. The resulting gain should be included in Fogg’s financial statements as a(an) a. Component of income from continuing

operations. b. Extraordinary item. c. Deferred credit. d. Component of other comprehensive income.

(6114)

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29. On September 22 of the previous year, Yumi

Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company’s local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20 on the current year, when the spot rate was $.65. The spot rate was $.70 on December 31 of the previous year. What amount should Yumi report as a foreign currency transaction loss in its income statement for the previous year ended December 31? a. $0 b. $500 c. $1,000 d. $1,500

(5568)

30. The functional currency of Nash Inc.’s

subsidiary is the euro. Nash borrowed euros as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash’s translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash’s consolidated financial statements? a. The translation loss less the exchange gain is

reported in other comprehensive income. b. The translation loss less the exchange gain is

reported in net income. c. The translation loss is reported in other

comprehensive income and the exchange gain is reported in net income.

d. The translation loss is reported in net income and the exchange gain is reported in other comprehensive income.

(2731)

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22

EARNINGS PER SHARE31. Ute Co. had the following capital structure

during the previous and current years:

Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding $250,000 Common stock, $5 par, 200,000 shares issued and outstanding 1,000,000

Ute reported net income of $500,000 for the current year ended December 31. Ute paid no preferred dividends during the previous year and paid $16,000 in preferred dividends during the current year. In its current year December 31 income statement, what amount should Ute report as earnings per share?

a. 2.42b. 2.45c. 2.48d. 2.50

(6127)

32. Earnings per share data should be reported inthe financial statements for

Discontinued operations

An extraordinary item

a. Yes No b. Yes Yes c. No Yes

d.

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No No (2524)

33. The following information pertains to Jet Corp.’soutstanding stock for the current year:

Common stock, $5 par value Shares outstanding 1/1 20,000 2-for-1 stock split 4/1 20,000 Shares issued 7/1 10,000

Preferred stock, $10 par value, 5% cumulative Shares outstanding 1/1 4,000

What are the number of shares Jet should use to calculate earnings per share?

a. 40,000b. 45,000c. 50,000d. 54,000

(4099)

34. On January 31, 1998, Pack, Inc. split itscommon stock 2 for 1, and Young Inc. issued a 5% stock dividend. Both companies issued their December 31, 1997, financial statements on March 1, 1998. Should Pack’s 1997 earnings per share(EPS) take into consideration the stock split, and should Young’s 1997 EPS take into considerationthe stock dividend?

Pack’s 1997 EPS Young’s 1997 EPSa. Yes No b. No No c. Yes Yes d. No Yes

(3456)

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23

35. The if-converted method of computing

earnings per share data assumes conversion of convertible securities as of the a. Beginning of the earliest period reported

(or at time of issuance, if later). b. Beginning of the earliest period reported

(regardless of time of issuance). c. Middle of the earliest period reported

(regardless of time of issuance). d. Ending of the earliest period reported

(regardless of time of issuance). (2006)

36. Mann, Inc. had 300,000 share of common

stock issued and outstanding at December 31, 1996. On July 1, 1997, an additional 50,000 shares of common stock were issued for cash. Mann also had unexercised stock options to purchase 40,000 shares of common stock at $15 per share outstanding at the beginning and end of 1997. The average market price of Mann’s common stock was $20 during 1997. What is the number of shares that should be used in computing basic earnings per share for the year ended December 31, 1997? a. 325,000 b. 335,000 c. 360,000 d. 365,000

(1296) 37. Dilutive stock options would generally be used

in the calculation of

Basic earnings per share

Diluted earnings per share

a. No No b. No Yes c. Yes Yes d. Yes No

(9062)

38. Cox Corporation had 1,200,000 shares of

common stock outstanding on January 1, and December 31, 1997. In connection with the acquisition of a subsidiary company in June 1996, Cox is required to issue 50,000 additional shares of its common stock on July 1, 1998, to the former owners of the subsidiary. Cox paid $200,000 in preferred stock dividends in 1997, and reported net income of $3,400,000 for the year. Cox’s diluted earnings per share for 1997 should be a. $2.83. b. $2.72. c. $2.67. d. $2.56.

(1299) 39. West Co. had earnings per share of $15.00 for

1997, before considering the effects of any convertible securities. No conversion or exercise of convertible securities occurred during 1997. However, possible conversion of convertible bonds would have reduced earnings per share by $0.75. The effect of possible exercise of common stock options would have increased earnings per share by $0.10. What amount should West report as basic earnings per share for 1997? a. $14.25 b. $14.35 c. $15.00 d. $15.10

(6128) 40. In determining earnings per share, interest

expense, net of applicable income taxes, on convertible debt that is dilutive should be a. Added back to net income for basic EPS, and

ignored for diluted EPS. b. Ignored for basic EPS, and added back to net

income for diluted EPS. c. Deducted from net income for basic EPS, and

ignored for fully diluted EPS. d. Deducted from net income for both basic EPS

and diluted EPS. (1974)

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24

Items 41 and 42 are based on the following: Information relating to the capital structure of Parke Corporation is as follows:

December 31 1996 1997

Outstanding shares of: Common stock 90,000 90,000

Preferred stock, convertible into 30,000 shares of common 30,000 30,000 10% convertible bonds, convertible into 20,000 shares of common $1,000,000 $1,000,000 During 1997, Parke paid $45,000 dividends on the preferred stock, which was earned in 1997. Parke’s net income for 1997 was $980,000 and the income tax rate was 40%.

41. For the year ended December 31, 1997, basic

EPS is a. $10.89 b. $10.39 c. $ 8.17 d. $ 7.79

(1294) 42. For the year ended December 31, 1997, diluted

EPS is a. $9.82 b. $8.29 c. $7.71 d. $7.43

(1295)

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(980-45) 　 (90,000株）

(980,000+(100,000-40,000tax) (90,000+30,000+20,000）

Documents

Ratio, Foreign Currency&EPS