Suggestions for Class Activities
1. Research Activity
Microsoft reported the following in a recent annual report:
Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible
employees. Compensation expense for the employee stock purchase plan is recognized in
accordance with SFAS No. 123(R). Shares of our common stock may be purchased by
employees at three-month intervals at 90% of the fair market value on the last day of each
three-month period. Employees may purchase shares having a value not exceeding 15% of their
gross compensation during an offering period.
Suggestions:
Have students describe way Microsoft accounts for shares purchased under this plan.
Note:
Since the discount to employees is 15%, the discount is considered to be compensation and
that amount is recorded as expense.
2. Research Activity
GAAP requires reporting both basic and diluted EPS, but there is some latitude in how these data
are reported within the financial statements.
Suggestions:
Have students locate financial statements of companies with which they are familiar. You
may want them to use the Internet where EDGAR at www.sec.com or specific corporate sites
will provide financial statements, seek out hard copy financial statements, or make their own
choice in how to locate the reports. Ask them to:
1. Indicate whether EPS data are reported on the income statement for basic, diluted, or
both. Are calculations explained in more detail in the footnotes?
2. Indicate whether EPS data are reported for both income from continuing operations and
net income.
3. Indicate whether per-share amounts also are reported for discontinued operations.
4. Locate and explain the reconciliation of the numerator and denominator used in the
computations.
3. Real World Scenario
Time Warner, Inc. reported first quarter profits from operations of $52 million, or a loss of 5
cents a share.
Suggestions:
Have students consider this statement. Ask them to suggest how it might be true.
Note:
The loss per share is due to the fact that preferred dividends were deducted from earnings
before dividing by the weighted-average number of shares outstanding.
4. Real World Scenario
Analysts attach great significance to earnings announcements. For that reason, companies are
particularly eager to meet earnings expectations. This desire has contributed to a relatively recent
trend, especially among technology firms, to report pro forma earnings per share.
Suggestions:
Ask students to perform an Internet search for companies that recently reported pro forma
EPS. Have them compare those numbers with GAAP EPS and describe the difference. Have
them evaluate the value of pro forma reporting of earnings.
Note:
Essentially, pro forma earnings are actual (GAAP) earnings reduced by any expenses the
reporting company feels are unusual and should be excluded. Pro forma results of a company
always are better than the real results.
When companies report pro forma results, they argue they are trying to help investors by
providing numbers that more accurately reflect their normal business activities, because they
exclude unusual expenses. Critics have argued otherwise. Due to the purely discretionary nature
of pro forma numbers and several infamous instances of abuse, it’s important to determine
precisely what expenses are excluded and what the actual GAAP numbers are.
5. Real World Scenario
The Motley Fool, in an online article, “Bye-Bye, Stock Options,” said:
Are you a faithful employee of a company that grants you stock options every now and
then? If so, find a chair and sit down. I’ve got some bad news for you. Stock options may
soon go the way of the dodo bird and saber-toothed tiger. Media conglomerate Time
Warner, for example, recently announced plans to significantly cut back on its options
issuance, eliminating them entirely for most employees. Why is this happening?
Suggestions:
Ask students to hypothesize as to “why this is happening.”
Note:
The Financial Accounting Standards Board (FASB) now requires companies to expense stock
options. Previously, many firms chose to have their cake and eat it, too—issue options as
compensation with no impact on their bottom lines. Now firms are increasingly choosing to do
away with options in favor of stock awards or other incentives, at least to some degree, to avoid
taking a big hit on their income statements.
6. Professional Skills Development Activities
The following are suggested assignments from the end-of-chapter material that will help your
students develop their communication, research, analysis, and judgment skills.
Communication Skills. In addition to Communication Case 19–2, Judgment Case 19–10 can
be adapted to ask students to assume the role of the consultant and write a memo to the
client explaining the paradox. Ethics Case 19–3 and Real World Case 19–7 are suitable for
student presentation(s). Real World Case 19–5 and Real World Case 19–7 do well as group
assignments. Questions 19–6 and 19–19 create good class discussions.
Research Skills. In their professional lives, our graduates will be required to locate and extract
relevant information from available resource material to determine the correct accounting
practice, perhaps identifying the appropriate authoritative literature to support a decision.
Research Cases 19–14 and 19–16 as well as Real World Case 19–1 provide excellent
opportunities to help students develop this skill. In addition, Problem 19–8 can be adapted
to require students to research the authoritative literature on performance plans.
Analysis Skills. The “Broaden Your Perspective” section includes Analysis Cases that direct
students to gather, assemble, organize, process, or interpret date to provide options for
making business and investment decisions. In addition to Analysis Cases 19–8, 19–9,
19–13, and 19–15, Problem 19–1, Real World Cases 19–5, 19–7, and 19–12, and
Communication Case 19–2 also provide opportunities to develop analysis skills.
Judgment Skills. The “Broaden Your Perspective” section includes Judgment Cases that
require students to critically analyze issues to apply concepts learned to business situations
in order to evaluate options for decision-making and provide an appropriate conclusion. In
addition to Judgment Case 19–10, Ethics Case 19–6 also requires students to exercise
judgment.
Assignment Chart
Learning Est.
time
Questions Objective(s) Topic
(min.)
19–1 1 Restricted stock and RSUs 5
19–2 2 Stock options 5
19–3 2 Qualified option plans 5
19–4 2 Performance and market conditions 5
19–5 3,5 EPS for a company with a simple capital
structure
5
19–6 5 Weighted average number of common shares 5
19–7 5,6 Weighted average number of common shares 5
19–8 7 Preferred dividends when calculating EPS 5
19–9 4 Distinguish between basic and diluted EPS 5
19–10 8 Incorporate the dilutive effect of stock options 5
19–11 9 Convertible securities 5
19–12 9 Convertible securities 5
19–13 10 Antidilutive securities 5
19–14 11 EPS; “proceeds” in the treasury stock method 5
19–15 12 Contingently issuable shares 5
19–16 9 Convertible securities actually converted 5
19–17 13 EPS disclosures 5
19–18 13 EPS disclosures 5
19–19 A Fair value 5
19–20 B SARs 5
Brief Learning Est.
time
Exercises Objective(s) Topic
(min.)
19–1 1 Restricted stock award 5
19–2 1 Restricted stock units 5
19–3 2 Stock options 5
19–4 2 Stock options; forfeiture 5
19–5 2 Stock options; forfeitures 5
19–6 2 Stock options; exercise 5
19–7 2 Stock options; expiration 5
19–8 2 Performance-based options 5
19–9 2 Performance-based options 5
19–10 2 Performance-based options 5
19–11 2 Options with market-based conditions 5
19–12 5,6 EPS; shares issued, shares retired 5
19–13 7 EPS; nonconvertible preferred shares 5
19–14 8 EPS; stock options 5
19–15 9 EPS; convertible preferred shares 5
19–16 11 EPS; restricted stock award 5
Learning Est.
time
Exercises Objective(s) Topic
(min.)
19–1 1 Restricted stock award plan 15
19–2 1 Restricted stock units 15
19–3 1 Restricted stock units; Facebook 10
19–4 1 Restricted stock units; forfeitures anticipated 15
19–5 1 Restricted stock units; forfeitures 15
19–6 2 Stock options 15
19–7 2 Stock options; forfeiture of options 20
19–8 2 Stock options; expirations 20
19–9 2 Stock options; exercise 20
19–10 3 Employee share purchase plan 20
19–11 3 Employee share purchase plan; Tesla Motors 15
19–12 5,6 EPS; shares issued; stock dividend 10
19–13 5,6 EPS; treasury stock; new shares; stock dividends;
two years
10
19–14 5,6,7 EPS; stock dividend; nonconvertible preferred
stock
10
19–15 5,6,7 EPS; net loss; nonconvertible preferred stock;
shares sold
20
19–16 5,6,7 EPS; stock dividend; nonconvertible preferred
stock; treasury shares; shares sold
10
19–17 5,6,7,8 EPS; stock dividend; nonconvertible preferred
stock; treasury shares; shares sold; stock options
20
19–18 5,6,7,8 EPS; stock dividend; nonconvertible preferred
stock; treasury shares; shares sold; stock options
exercised
20
19–19 5,6,7,8,9 EPS; stock dividend; nonconvertible preferred
stock; treasury shares; shares sold; stock options;
convertible bonds
20
19–20 6,7,8,9 EPS; shares issued; stock options 15
19–21 7,9 EPS; convertible preferred stock; convertible
bonds; order of entry
15
19–22 11 EPS; restricted stock 15
19–23 1,11 Record restricted stock; effect on EPS 15
19–24 6,12 New shares; contingently issuable shares 15
19–25 6,12 EPS; new shares; contingent agreements 15
19–26 5–13 EPS; concepts; terminology 20
19–27 2 FASB codification research 15
19–28 2,3,7,13 FASB codification research 15
19–29 19B Stock appreciation rights; settlement in shares 15
19–30 19B Stock appreciation rights; cash settlement 25
19–31 19B Restricted stock units; cash settlement 25
Learning Est.
time
Problems Objective(s) Topic
(min.)
19–1 2 Stock options; forfeiture; exercise 25
19–2 2 Stock options; graded vesting 15
19–3 2 Stock options; graded vesting; measurement
using a single fair value per option
15
19–4 2,14 Stock options; graded vesting; IFRS 15
19–5 2 Stock option plan; deferred tax effect
recognized
40
19–6 2 Stock option plan; deferred tax effect of a
nonqualifying plan 40
19–7 2 Performance option plan 25
19–8 5,6,7,13 Net loss; stock dividend; nonconvertible
preferred stock; treasury shares; shares sold;
discontinued operations
25
19–9 4,5,6 EPS from statement of retained earnings 20
19–10 4,5,6 EPS from statement of shareholders’ equity 25
19–11 4,5,6,7 EPS; nonconvertible preferred stock; treasury
shares; shares sold; stock dividend
15
19–12 4,5,6,7,8,10 EPS; nonconvertible preferred stock; treasury
shares; shares sold; stock dividend; options
20
19–13 4,5,6,7,8,9,10,11 EPS; nonconvertible preferred stock; treasury
shares; shares sold; stock dividend; options;
convertible bonds; contingently issuable
shares
40
19–14 7,9,10 EPS; convertible preferred stock; convertible
bonds; order of entry
15
19–15 4,5,6,7,8,9,10,13 EPS; antidilution 25
19–16 4,5,6,9 EPS; convertible bonds; treasury shares 20
19–17 4,5,6,7,8,9 EPS; options; convertible preferred;
additional shares
15
19–18 4,5,6,7,8,9 EPS; stock options; nonconvertible preferred;
convertible bonds; shares sold
25
19–19 1,2,4,8,11 EPS; options; restricted stock; additional
components for “proceeds” in treasury stock
method
40
Star Problems
Learning Est.
time
Cases Objective(s) Topic
(min.)
Real World Case 19–1 1 Restricted stock; Microsoft 25
Communication Case 19–2 2 Stock options; basic concepts; prepare a memo 60
Ethics Case 19–3 2 Stock options 25
Trueblood Accounting
Case 19–4
1,2 Share-based awards 45
Real World Case 19–5 1,2 Share-based plans; Walmart 45
Ethics Case 19–6 6 International Network Solutions 25
Real World Case 19–7 8 Per share data; stock options; antidilutive
securities; Best Buy Co.
25
Analysis Case 19–8 4,5,6,7,8 EPS concepts 25
Analysis Case 19–9 5,6,7,8 EPS 25
Judgment Case 19–10 4,5,6,7,9 Where are the profits? 40
Communication Case 19–11 9 Dilution 45
Real World Case 19–12 13 Reporting EPS; discontinued operations; Kaman 35
Analysis Case 19–13 13 Analyzing financial statements; price-earnings
ratio; dividend payout ratio 30
Research Case 19–14 13 Determining and comparing price-earnings
ratios; retrieving stock prices and earnings per
share numbers from the Internet; Microsoft;
Intel
60
Analysis Case 19–15 13 Kellogg’s EPS; PE ratio; dividend payout 25
Research Case 19–16 13 FASB codification; locate and extract relevant
information and cite authoritative support for a
financial reporting issue; change in
classification of a share-based compensation
instrument
60
Target Case 2,3,8 IFRS; accounting for share-based compensa-
tion and earnings per share; Target Corporation
30
Air France–KLM Case 9IFRS; accounting for share-based compensa-
tion and earnings per share; Air France–KLM
30