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24) Which of the following statements regarding earnings per share (EPS) is incorrect?
A) EPS for income from continuing operations must be reported on the face of the income statement.
B) EPS is the most widely used of all business statistics.
C) When computing EPS, preferred dividends are subtracted from net income because the preferred
stockholders have the first claim to dividends.
D) EPS reports the amount of income (loss) for each share of the company's issued common stock.
25) Nathan Corporation's accounting records include the following items for the year ending December
31, 2018:
Gain on Sale of Equipment $12,000 Gain on Discontinued Operations $75,000
Loss on Disposal of Equipment 5,000 Net Sales 650,000
Cost of Goods Sold 285,000 Operating Expenses 120,000
The income tax rate for the company is 45%. The company had 15,000 shares of common stock
outstanding during 2018 and no preferred stock. Prepare Nathan's income statement for the year ending
December 31, 2018. Show how Nathan reports EPS data on its 2018 income statement.
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Copyright © 2018 Pearson Education, Inc.
Learning Objective 13-6
1) Companies can report a negative amount in retained earnings.
2) Companies usually report their retained earnings restrictions on the balance sheet.
3) The statement of retained earnings reports how the company's retained earnings balance changed from
the beginning of the period to the end of the period.
4) A deficit occurs when a company has reoccurring losses and/or declares dividends in excess of retained
earnings.
5) Most states prohibit corporations from paying a dividend if a deficit will occur.
6) A net loss for the year decreases the balance in Retained Earnings.
7) Errors are corrected by adjusting the beginning balance in the Retained Earnings account in the period
the error is discovered.
8) Restrictions on retained earnings are ________.
A) reported on the statement of cash flows
B) usually reported in the notes to the financial statements
C) reported on the income statement
D) designed to maximize dividends paid to shareholders
9) Cash dividends and treasury stock purchases ________.
A) represent cash payments that are made to ensure higher reported profits
B) may be limited by creditors to ensure that the company maintains a minimum level of stockholders'
equity
C) may be restricted as a way to lower federal income tax expense
D) make more resources available to pay liabilities
10) Which of the following best describes the appropriation of retained earnings?
A) restricting part of retained earnings for expansion or contingencies
B) setting cash aside for expansion
C) designating certain amounts of retained earnings for cash dividends that are required to be paid to
shareholders
D) limiting company transactions in order to boost earnings
11) Which of the following statements is true?
A) Appropriations of retained earnings require journal entries, but restrictions on retained earnings are
usually reported in notes to the financial statements.
B) No journal entries are needed to appropriate or restrict retained earnings.
C) Both appropriations and restrictions of retained earnings require journal entries.
D) Restrictions on retained earnings must be journalized, but appropriations are usually reported in notes
to the financial statements.
12) Prior period adjustments ________.
A) always increase the beginning balance of retained earnings
B) are shown on the statement of retained earnings as corrections to the beginning balance
C) can be ignored because the financial statements have already been issued
D) must be recorded in the period in which the error occurred
13) Thomas Business Supply reported a negative amount in Retained Earnings. What term describes this
negative amount? What can cause this to happen?
14) What is a prior-period adjustment? How and when is a prior-period adjustment recorded?
15) Home Gallery, Inc. had beginning retained earnings of $125,000 on January 1, 2019. During the year,
Home Gallery declared and paid $40,000 of cash dividends and earned $55,000 of net income. Prepare a
statement of retained earnings for Home Gallery, Inc. for the year ending December 31, 2019.
16) The statement of stockholders' equity has less information than the statement of retained earnings.
17) The statement of stockholders' equity has more information than the statement of retained earnings
because it reports the changes in all stockholders' equity accounts.
18) The statement of stockholders' equity reports the number of shares and any changes during the year
in preferred, common, and treasury stock.
19) The statement of stockholders' equity does not show the changes to the Retained Earnings account
because that information is provided in the statement of retained earnings.
20) Regarding the statement of stockholders' equity, which of the following statements is incorrect?
A) The statement of stockholders' equity has more information than the statement of retained earnings
because it reports the changes in all stockholders' equity accounts.
B) The statement of stockholders' equity does not show the changes to the Retained Earnings account
because that information is provided in the statement of retained earnings.
C) The statement of stockholders' equity is an option for reporting the changes in stockholders' equity of
a corporation.
D) The statement of stockholders' equity reports the number of shares and any changes during the year in
preferred, common, and treasury stock.
21) The statement of stockholders' equity ________.
A) reports the number of shares and any changes during the year in preferred, common, and treasury
stock
B) is required to be presented along with the statement of retained earnings
C) is not required by IFRS
D) does not show the changes to the Retained Earnings account because that information is provided in
the statement of retained earnings
1) To compare companies of different sizes, investors need some standard profitability ratios.
2) Earnings per share is a liquidity measure that is used to compare companies of different sizes.
3) Which of the following is NOT a profitability measure that is used to compare companies of different
sizes?
A) earnings per share
B) rate of return on common stockholders' equity
C) price/earnings ratio
D) outstanding common stock ratio
4) Earnings per share is calculated as net income plus preferred dividends divided by the average
number of common shares outstanding.
5) FASB requires that earnings per share be reported on the income statement.
6) Reunion Corporation provides the following information.
March 31, 2018
March 31, 2019
Net Income
$358,000
$425,500
Preferred Dividends
0
0
Total Stockholders' Equity
$4,380,000
$5,132,000
Stockholders' Equity attributable to Preferred
Stock
0
0
Number of Common Shares Outstanding
294,464
195,168
Based on the information provided above, compute the earnings per share of Reunion Corporation as of
March 31, 2019. (Round any intermediate calculations and your final answer to the nearest cent.)
A) $1.22
B) $2.18
C) $1.74
D) $1.46
