978-1259722660 Chapter 19 Solution Manual Part 11

Case 19–12 (concluded)

Requirement 2

Sometimes, the effect of potential common shares would be to increase, rather than

decrease, EPS. These we refer to as “antidilutive” securities. Such securities are

ignored when calculating both basic and diluted EPS. For example, when we

adjust shares for the effect of stock options being exercised, we apply what’s called

the “treasury stock” method. The number of shares assumed repurchased is fewer

Case 19–12 (concluded)

Requirement 3

2015 2014

2013

Earnings per share

Basic

_____ _____ ___

__

Diluted:

(0.09)

Earnings per share from disposal of discontinued operations — (0.18) 0.02

_____ _____ ___

__

* $65,780 ÷ 27,053 = $2.43

Analysis Case 19–13

Requirement 1

In its simplest form, earnings per share is merely a firm’s net income divided by

the number of shares outstanding throughout the year.

Earnings per share = Income available to common shareholders

Weighted-average shares outstanding

Requirement 2

Price-earnings ratio = Market price per share

Earnings per share

The calculation indicates that IGF’s share price represents $17.50 for every

dollar of earnings. In that regard, it measures the “quality” of earnings in the sense

Case 19–13 (concluded)

Requirement 3

The dividend payout ratio expresses the percentage of earnings that is

distributed to shareholders as dividends. To calculate the ratio for IGF with the

information provided, we must estimate dividends from analysis of the retained

earnings account:

Retained Earnings

2,428

487Net income

Dividends ?

Dividend payout ratio = Cash dividends per share

Earnings per share

IGF paid cash dividends of $1.02 cents per share during the most recent year,

almost 38% of earnings. The ratio provides an indication of the firm’s reinvestment

Research Case 19–14

The results students report will vary somewhat depending on the dates and

The PE ratio is the market price per share divided by the earning per share. It

measures the market’s perception of the “quality” of a company’s earnings by

indicating the price multiple the capital market is willing to pay for the company’s

Analysis Case 19–15

Requirement 1

The price-earnings ratio is simply the market price per share divided by the

earnings per share. For Kellogg, the ratio is:

It purports to measure the market’s perception of the “quality” of a company’s

earnings by indicating the price multiple the securities market is willing to pay for

Care is needed when evaluating price-earnings ratios. Like other ratios, it is

best evaluated in the context of P/E ratios of earlier periods and other, similar

Case 19–15 (concluded)

Requirement 2

The dividend payout ratio expresses the percentage of earnings that is distributed

Relative to the average company, this payout percentage is quite high. It is

higher even than that of General Mills, Kellogg’s prime competitor. General Mills’

payout ratio was 75% at the same time. Historically, both companies and the

Research Case 19–16

Requirement 1

The appropriate accounting treatment for the situation is specified in FASB ASC

718–10–35: “Compensation–Stock Compensation–Overall.” Section 718–10–35–15

states:

Change in Classification Due to Change in Probable Settlement Outcome

35-15 An option or similar instrument that is classified as equity, but

subsequently becomes a liability because the contingent cash settlement event is

probable of occurring, shall be accounted for similar to a modification from an

equity to liability award. That is, on the date the contingent event becomes

probable of occurring (and therefore the award must be recognized as a liability),

the entity recognizes a share-based liability equal to the portion of the award

Requirement 2

National Paper should record a liability for the portion of the award attributed to

past service (2/5) multiplied by the award’s fair value ($8 million) on the date

Target Case

Requirement 1

Compensation expense associated with share-based awards is recognized on a

Requirement 2

Three types of awards are described in Note 26. Share-Based Compensation:

Requirement 3

Projections of future performance should be based primarily on continuing

Requirement 4

Securities, like stock options or restricted stock awards, while not being

common stock, may become common stock through their exercise or vesting. As a

Air France–KLM Case

Requirement 1

Note 30 indicates that the PPSs correspond to share-based plans with

settlement in cash. As such, they are accounted for as liabilities. AF’s PPSs options

Under IFRS, the straight-line method is not permitted. Also, there’s no

The PPS options also are performance-based, which means that under either

U.S. GAAP or IFRS the amount expensed depends on whether it’s “probable” that

the performance target will be met. Remember, though, that probable means

Requirement 2

AF reported basic earnings and diluted earnings per share of €.34 in its

income statement for 2015. If AF used U.S. GAAP, it would have reported EPS

using the same basic/diluted classification. The earnings per share requirements of